n-16-73.pdf

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Part III - Administrative, Procedural, and Miscellaneous

Treatment of Certain Triangular Reorganizations Involving Foreign Corporations;
Amount of Income Inclusion in Certain Inbound Nonrecognition Transactions

Notice 2016-73

SECTION 1. OVERVIEW
This notice announces that the Department of the Treasury (Treasury
Department) and the Internal Revenue Service (IRS) intend to issue regulations under
section 367 of the Internal Revenue Code (Code) to modify the rules relating to the
treatment of property used to acquire parent stock or securities in certain triangular
reorganizations involving one or more foreign corporations, and the consequences to
persons that receive parent stock or securities pursuant to such triangular
reorganizations. This notice also announces that the Treasury Department and the IRS
intend to issue regulations under section 367 to modify the amount of an income
inclusion required in certain inbound nonrecognition transactions.
SECTION 2. BACKGROUND
.01 Section 367(a)
Section 367(a)(1) provides that if, in connection with any exchange described in
section 332, 351, 354, 356, or 361, a United States person (U.S. person) transfers
property to a foreign corporation, the foreign corporation shall not, for purposes of

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determining the extent to which gain shall be recognized on such transfer, be
considered to be a corporation. Sections 367(a)(2), (3), and (6) provide exceptions to
the general rule of section 367(a)(1) and grant regulatory authority to the Secretary to
provide additional exceptions and to limit the statutory exceptions.
.02 Section 367(b)
Section 367(b)(1) provides that, in the case of an exchange described in section
332, 351, 354, 355, 356, or 361 in connection with which there is no transfer of property
described in section 367(a)(1), a foreign corporation shall be considered to be a
corporation except to the extent provided in regulations prescribed by the Secretary that
are necessary or appropriate to prevent the avoidance of U.S. federal income taxes.
Section 367(b)(2) provides that the regulations prescribed pursuant to section 367(b)(1)
shall include (but shall not be limited to) regulations dealing with the sale or exchange
of stock or securities in a foreign corporation by a U.S. person, including regulations
providing the circumstances under which gain is recognized or deferred, amounts are
included in gross income as a dividend, adjustments are made to earnings and profits,
or adjustments are made to the basis of stock or securities.
.03 Section 1.367(b)-10
(a) In General
Section 1.367(b)-10 (final regulations) applies to certain triangular
reorganizations in which a subsidiary (S) acquires stock or securities of its parent
corporation (P) in exchange for property (the P acquisition), and S exchanges the P

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stock or securities so acquired for stock, securities, or property of a target corporation
(T). The final regulations do not apply unless P or S (or both) is a foreign corporation.
The application of the final regulations is also subject to certain exceptions, including
the section 367(a) priority rule discussed below.
When applicable to a triangular reorganization, the final regulations require that
adjustments be made that have the effect of a distribution of property from S to P under
section 301 (deemed distribution). §1.367(b)-10(b)(1). For this purpose, the amount of
the deemed distribution generally is the amount of property that was transferred by S to
acquire the P stock and securities in the P acquisition. Id. For purposes of making the
required adjustments, the final regulations treat the deemed distribution as a separate
transaction that occurs before the P acquisition or, if P does not control S at the time of
the P acquisition, immediately after P acquires control of S, but before the triangular
reorganization. §1.367(b)-10(b)(3).
The term property for purposes of the final regulations has the meaning set forth
in section 317(a) (that is, money, securities, and any other property, other than stock in
the corporation making the distribution), as modified to take into account certain
assumed liabilities and S stock or rights used by S to acquire P stock or securities from
a person other than P. §1.367(b)-10(a)(3)(ii).
(b) Priority Rules
Section 1.367(b)-10(a)(2)(iii) provides that the final regulations do not apply to a
triangular reorganization if, in an exchange under section 354 or 356, one or more U.S.

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persons exchange stock or securities of T and the amount of gain in the T stock or
securities recognized by such U.S. persons under section 367(a)(1) is equal to or
greater than the sum of the amount of the deemed distribution that would be treated by
P as a dividend under section 301(c)(1) and the amount of such deemed distribution
that would be treated by P as gain from the sale or exchange of property under section
301(c)(3) (together, section 367(b) income) if the final regulations otherwise would
apply to the triangular reorganization (section 367(a) priority rule).
Section 1.367(a)-3(a)(2)(iv) provides a similar priority rule that turns off the
application of section 367(a)(1) to an exchange under section 354 or 356 that occurs in
connection with a triangular reorganization described in the final regulations if the
amount of gain that otherwise would be recognized under section 367(a)(1) (without
regard to any exceptions thereto) is less than the amount of the section 367(b) income
recognized under the final regulations (section 367(b) priority rule).
(c) Anti-Abuse Rule
The final regulations provide that appropriate adjustments shall be made if, in
connection with a triangular reorganization, a transaction is engaged in with a view to
avoid the purpose of the final regulations (anti-abuse rule). §1.367(b)-10(d). The anti-
abuse rule sets forth one example, which provides that the earnings and profits of S will
be deemed to include the earnings and profits of a corporation related to P or S for
purposes of determining the consequences of the adjustments provided in the final
regulations, if S is created, organized, or funded to avoid the application of the final

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regulations with respect to the earnings and profits of that related corporation. Id.
(d) Notice 2014-32
On April 25, 2014, the Treasury Department and the IRS issued Notice 2014-32
(2014-20 IRB 1006) (2014 notice), which announced the intention to issue regulations
modifying and clarifying the final regulations. The 2014 notice addressed, in part,
certain inversion transactions that were structured to be subject to the final regulations
in order to avoid shareholder-level gain recognition under section 367(a)(1) by reason
of the section 367(b) priority rule, notwithstanding that only a minimal amount of income
was subject to U.S. tax by reason of a deemed distribution under the final regulations.
The 2014 notice announced that the final regulations would be modified to provide that
section 367(b) income includes a section 301(c)(1) dividend or section 301(c)(3) gain
that would arise if the final regulations applied to the triangular reorganization only to
the extent such dividend income or gain would be subject to U.S. tax or would give rise
to an income inclusion under section 951(a)(1)(A) that would be subject to U.S. tax.
The 2014 notice also announced that the anti-abuse rule would be clarified to
provide that S’s acquisition of P stock or securities in exchange for a note may invoke
the anti-abuse rule, and that the earnings and profits of a corporation (or a successor
corporation) may be taken into account for purposes of determining the consequences
of the adjustments provided in the final regulations, as modified by the rules announced
in the notice, regardless of whether such corporation is related to P or S before the
triangular reorganization.

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Finally, the 2014 notice announced that the anti-abuse rule would be clarified to
provide that a funding of S may occur after the triangular reorganization and that a
funding of S could include capital contributions, loans, and distributions.
.04 Sections 1.367(b)-4 and 1.367(b)-4T
Sections 1.367(b)-4 and 1.367(b)-4T apply to certain acquisitions by a foreign
corporation of the stock or assets of a foreign corporation (referred to in those
regulations and this notice as the “foreign acquired corporation”) in an exchange
described in section 351 or in a reorganization described in section 368(a)(1). Sections
1.367(b)-4T(b) and 1.367(b)-4(b)(1) provide that, if the potential application of section
1248 cannot be preserved following the acquisition of the stock or assets of a foreign
corporation by another foreign corporation in an exchange subject to section 367(b),
then certain exchanging shareholders of the foreign acquired corporation must include
in income as a dividend the section 1248 amount attributable to the stock of the foreign
acquired corporation exchanged. However, the scope and purpose of the grant of
authority in section 367(b) are not limited to the preservation of section 1248 amounts,
and the regulations thereunder are not limited to requiring an inclusion of the section
1248 amount with respect to the stock of a foreign acquired corporation exchanged.
Section 367(b) provides the Treasury Department and the IRS broad authority to issue
regulations applicable to nonrecognition transactions that are “necessary or appropriate
to prevent the avoidance of Federal income taxes,” including regulations that prescribe
“the circumstances under which gain shall be recognized currently, or amounts included

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in gross income currently as a dividend, or both.”
.05 Inbound Transactions and the All Earnings and Profits Amount
Section 1.367(b)-3 applies when a foreign corporation transfers assets to a
domestic corporation pursuant to either a liquidation described in section 332 or an
asset reorganization described in section 368 (in each case, an “inbound transaction”).
Section 1.367(b)-3(a) and this notice refer to such foreign corporation as the “foreign
acquired corporation” and such domestic corporation as the “domestic acquiring
corporation.” When there is an inbound transaction, in general, §1.367(b)-3 requires
certain shareholders (including certain foreign corporate shareholders) of the foreign
acquired corporation to include in income as a deemed dividend the all earnings and
profits amount with respect to their stock. Under §1.367(b)-2(d), the all earnings and
profits amount of a foreign acquired corporation is determined under the principles of
section 1248 for computing the amount of earnings and profits attributable to stock, with
certain modifications. For example, the all earnings and profits amount does not take
into account earnings and profits of foreign subsidiaries of the foreign acquired
corporation, notwithstanding section 1248(c)(2). §1.367(b)-2(d)(3)(ii).
Section 1.367(b)-3 is intended to ensure that a domestic acquiring corporation
does not succeed to the basis in the assets of the foreign acquired corporation except
to the extent that a U.S. person that is a shareholder (including indirect ownership
through certain foreign corporate shareholders) of the foreign acquired corporation has
been subject to U.S. tax on its share of the earnings and profits that gave rise, in whole

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or in part, to the basis. See, for example, the discussion concerning inbound
transactions in the preambles to TD 8862 (65 FR 3589-01, 2000-1 CB 466) and
proposed regulations issued in 1991 (56 FR 41993, 1991-2 CB 1070). The definition of
the all earnings and profits amount, in particular its limitation with respect to the
earnings and profits of subsidiaries, is premised on an assumption that the basis in the
assets of the foreign acquired corporation reflects solely the earnings and profits of the
foreign acquired corporation, the liabilities of the foreign acquired corporation, and
capital acquired from a shareholder.
.06 Nonqualified Preferred Stock
Section 351(g)(1) provides, in relevant part, that section 351(a) does not apply to
a transfer of property in exchange for nonqualified preferred stock, as defined in section
351(g)(2).
SECTION 3. TRANSACTIONS AT ISSUE
The Treasury Department and the IRS are aware that taxpayers are engaging in
transactions designed to repatriate earnings and basis of foreign corporations without
incurring U.S. tax by exploiting the section 367(a) priority rule, as modified by the 2014
notice. In one such transaction, USP, a domestic corporation, wholly owns FP, a
foreign corporation, which, in turn, wholly owns FS, another foreign corporation. FP has
no earnings and profits, but FS has substantial earnings and profits. A dividend from
FS to FP would qualify for the exception to foreign personal holding company income
under section 954(c)(6). USP also wholly owns USS, a domestic corporation, which, in

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turn, wholly owns FT, a foreign corporation. Pursuant to a transaction undertaken for
the purported business purpose of integrating FT into the FP-FS ownership chain, FS
acquires FP stock from FP in exchange for cash, a note, or other property (the FP
acquisition) and uses the FP stock to acquire all of the stock of FT from USS in a
transaction intended to qualify as a reorganization described in section 368(a)(1)(B) (FT
reorganization). On a later date, and purportedly unrelated to the FT reorganization, FP
engages in an inbound transaction described in §1.367(b)-3, for example, a transfer of
all of FP’s assets, including the cash, note, or other property received from FS, to USP
or a domestic subsidiary of USP.
In this transaction, the transfer by USS of the FT stock to FS in exchange for
stock of FP pursuant to the FT reorganization is an indirect stock transfer described in
§1.367(a)-3(d)(1)(iii)(A). Pursuant to §1.367(a)-3(b), the taxpayer files a gain
recognition agreement under §1.367(a)-8 with respect to USS’s transfer of FT stock on
all but a de minimis amount of FT stock, and, with respect to that de minimis amount of
FT stock, recognizes a small amount of gain under section 367(a)(1). Furthermore, the
taxpayer applies the priority rules by comparing the section 367(b) income to the de
minimis amount of gain under section 367(a)(1) to determine whether the final
regulations apply to the FP acquisition. In computing the amount of section 367(b)
income for purposes of the section 367(a) priority rule, the taxpayer takes the position
that a deemed distribution from FS to FP would not result in section 367(b) income, as
described in the 2014 notice, because any dividend income to FP would not be subject

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to U.S. tax and would not give rise to an income inclusion under section 951(a)(1)(A) by
reason of section 954(c)(6). Accordingly, the taxpayer takes the position that the
section 367(b) income (which, under this position, is zero) does not exceed the section
367(a) gain and, therefore, the final regulations do not apply to the FP acquisition by
reason of the section 367(a) priority rule. Furthermore, the taxpayer takes the position
that the subsequent inbound transaction with respect to FP results in no income
inclusion to USP under §1.367(b)-3 because FP’s earnings and profits are not
increased under the final regulations and thus FP’s all earnings and profits amount is
zero. Finally, the taxpayer takes the position that the anti-abuse rule does not apply in
this case for various reasons that may include: (1) the FP acquisition is not engaged in
with a view to avoid the purpose of the final regulations because it is engaged in for the
purpose of integrating FT into the FP-FS chain; (2) the FP acquisition is not a
transaction that occurs in connection with the FT reorganization because the acquisition
is specifically contemplated by the final regulations; (3) the inbound transaction with
respect to FP does not occur in connection with the FT reorganization because it does
not occur pursuant to the same plan as the FT reorganization; or (4) the anti-abuse rule
only applies to adjust the earnings and profits of FS to take into account the earnings
and profits of another corporation and, in this regard, FS is not created, organized, or
funded to avoid the purpose of the final regulations with respect to the earnings and
profits of another corporation.

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The Treasury Department and the IRS also are aware of a similar transaction in
which taxpayers take advantage of the rule in section 951(a)(1)(A) that requires a U.S.
shareholder to include in its gross income its pro rata share of the subpart F income of
a foreign corporation only if the foreign corporation has been a controlled foreign
corporation for an uninterrupted period of 30 days or more during the taxable year (the
30-day rule). In this form of the transaction, FP is formed, and the FP acquisition
occurs, during the final 29 days of FP’s taxable year. In computing the amount of
section 367(b) income for purposes of the section 367(a) priority rule in this transaction,
the taxpayer takes the position that a deemed distribution from FS to FP would not
result in any section 367(b) income, as described in the 2014 notice, because any
income recognized by FP (including capital gain under section 301(c)(3)) would not be
subject to U.S. tax and would not give rise to an income inclusion under section
951(a)(1)(A) by reason of the 30-day rule.
The Treasury Department and the IRS also are aware of another variation of the
transaction intended to repatriate earnings of a foreign corporation without U.S. tax
through the use of nonqualified preferred stock. In one such transaction, USP, a
domestic corporation, wholly owns both FP, a foreign corporation, and USS, a domestic
corporation. USS wholly owns FT, a foreign corporation, which has substantial
earnings and profits. FP has no earnings and profits. FP acquires newly-issued stock
of USP from USP in exchange for nonqualified preferred stock of FP, and then FP uses
the USP stock as consideration to acquire all of the stock of FT from USS in a

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transaction intended to qualify as a reorganization described in section 368(a)(1)(B).
On a subsequent date, when FP still has no earnings and profits, FP redeems the FP
nonqualified preferred stock held by USP in exchange for cash or a note.
The taxpayer takes the position that FP’s acquisition of USP stock is not subject
to the final regulations because the FP nonqualified preferred stock is not “property”
within the meaning of §1.367(b)-10(a)(3)(ii). Furthermore, the taxpayer takes the
position that USP’s transfer of its own stock to FP in exchange for nonqualified
preferred stock does not qualify as an exchange described in section 351 pursuant to
section 351(g)(2) and, therefore, USP takes a basis in the FP nonqualified preferred
stock equal to its fair market value under §1.1032-1(d). In addition, the taxpayer takes
the position that the redemption of the FP nonqualified preferred stock does not result
in dividend income or capital gain to USP under section 301(c) because FP does not
have earnings and profits and the redemption is applied against and reduces USP’s
basis in the FP stock under section 301(c)(2). Finally, the taxpayer takes the position
that the anti-abuse rule does not apply in such a case for reasons similar to those
discussed above in the context of the transaction involving section 954(c)(6).
The Treasury Department and the IRS have determined that these transactions
raise significant policy concerns and that the revisions to the regulations described in
Section 4 of this notice are necessary or appropriate to prevent the avoidance of U.S.
federal income taxes. The Treasury Department and the IRS intend to revise the
regulations under section 367 accordingly.

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SECTION 4. REGULATIONS TO BE ISSUED
.01 Priority Rules
The Treasury Department and the IRS intend to modify the section 367(a)
priority rule to apply only when T is a domestic corporation. Accordingly, when T is a
foreign corporation, the final regulations, as modified by the rules described in this
notice, will apply to a triangular reorganization described in §1.367(b)-10(a)(1), unless
an exception in §1.367(b)-10(a)(2)(i) or (ii) applies.
The Treasury Department and the IRS intend to modify the section 367(b)
priority rule to provide that, in an exchange under section 354 or 356 that occurs in
connection with a transaction described in the final regulations, to the extent one or
more U.S. persons exchange stock or securities of a foreign corporation for P stock or
securities acquired by S in exchange for property (as defined in §1.367(b)-10(a)(3)(ii),
as modified by the regulations described in this notice) in the P acquisition, section
367(a)(1) will not apply to such U.S. persons with respect to the exchange of the stock
or securities of the foreign corporation. Instead, the exchange will be subject to
§§1.367(b)-4 and 1.367(b)-4T, as modified by the regulations described in this notice.
The section 367(b) priority rule, as modified by the regulations described in the 2014
notice, will continue to apply when T is a domestic corporation. In addition, section
367(a) will apply to the exchange of stock or securities of a foreign corporation to the
extent such T stock or securities are exchanged for P stock or securities that are not
acquired by S in exchange for property (as defined in §1.367(b)-10(a)(3)(ii), as modified

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by this notice) in connection with a transaction described in §1.367(b)-10.
.02 Sections 1.367(b)-4 and 1.367(b)-4T
The Treasury Department and the IRS intend to modify §§1.367(b)-4 and
1.367(b)-4T to provide that, in an exchange under section 354 or 356 that occurs in
connection with a transaction described in the final regulations, to the extent an
exchanging shareholder exchanges stock or securities of a foreign acquired corporation
for P stock or securities acquired by S in exchange for property (defined in §1.367(b)-
10(a)(3)(ii), as modified by the regulations described in this notice) in the P acquisition,
then such shareholder must:
(i) Include in income as a deemed dividend the section 1248 amount attributable
to the stock of the foreign acquired corporation that it exchanges; and
(ii) After taking into account the increase in basis 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 of the foreign acquired corporation exchanged that would not
otherwise be recognized.
For purposes of the preceding paragraph, an exchanging shareholder is a U.S.
person or foreign person that exchanges stock of a foreign acquired corporation in a
prescribed exchange, regardless of whether such U.S. person is a section 1248
shareholder or such foreign person is a foreign corporation in which a U.S. person is a
section 1248 shareholder.
.03 All Earnings and Profits Amount

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(a) General Rule
The Treasury Department and the IRS intend to modify §1.367(b)-2(d)(3)(ii) to
provide that, if there is excess asset basis with respect to a foreign acquired
corporation, then, in the case of an exchanging shareholder to which §1.367(b)-3(b)(3)
applies, the all earnings and profits amount with respect to the stock in the foreign
acquired corporation that it exchanges will be increased by the specified earnings with
respect to such stock (if any).
(b) 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 the foreign acquired
corporation exceeds the sum of the following amounts:
(i) The earnings and profits of the foreign acquired corporation attributable to the
outstanding stock of the foreign acquired corporation. For this purpose, the earnings
and profits attributable to stock of the foreign acquired corporation is determined under
the principles of §1.367(b)-2(d) but without regard to whether the exchanging
shareholder is described in §1.367(b)-3(b)(1) or is a U.S. person or a foreign person.
Furthermore, the earnings and profits of the foreign acquired corporation will include
amounts described in section 1248(d)(3) or 1248(d)(4).
(ii) The aggregate basis in the outstanding stock of the foreign acquired
corporation determined immediately before the inbound transaction and without regard
to any basis increase described in §1.367(b)-2(e)(3)(ii) resulting from such inbound

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transaction.
(iii) The aggregate amount of liabilities of the foreign acquired corporation that
are assumed by the domestic acquiring corporation in the inbound transaction
determined under the principles of section 357(d).
(c) Inside Asset Basis
The term inside asset basis means, with respect to a foreign acquired
corporation, the adjusted basis of the assets of the foreign acquired corporation in the
hands of the domestic acquiring corporation determined immediately after the inbound
transaction.
(d) Specified Earnings
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):
(i) 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. 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 transaction. The amount described in

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this Section 4.03(d)(i) is referred to in this notice as the “lower-tier earnings.”
(ii) The product of the excess asset basis of the foreign acquired corporation,
multiplied by the exchanging shareholder’s specified percentage.
(iii) The amount of gain that would be realized by the exchanging shareholder if,
immediately before the inbound 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 notice). The amount described in
this Section 4.03(d)(iii) is referred to in this notice as the “specified stock gain.”
(e) Specified Percentage
The term specified percentage means, with respect to an exchanging
shareholder, a fraction (expressed as a percentage), the numerator of which is the
amount of the exchanging shareholder’s specified stock gain, and the denominator 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.
(f) Source of Specified Earnings
If the specified earnings attributable to the stock of a foreign acquired
corporation exchanged by an exchanging shareholder is less than the lower-tier
earnings attributable to the stock exchanged, the specified earnings of the exchanging

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shareholder will be sourced from lower-tier earnings of foreign subsidiaries of the
foreign acquired corporation under the principles of §1.1248-1(d)(3).
(g) Adjustments to Excess Asset Basis
If there is excess asset basis with respect to a foreign acquired corporation, as
determined under Section 4.03(b) of this notice, 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 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).
For purposes of this Section 4.03(g), property used by a foreign subsidiary to
purchase the stock of the foreign acquired corporation in connection with a triangular
reorganization is treated as property provided by the foreign subsidiary. In addition, the
term property has the meaning provided in §1.367(b)-10(a)(3)(ii), as modified by this
notice. Finally, a reference to a foreign acquired corporation or foreign subsidiary
includes a predecessor of the foreign acquired corporation or foreign subsidiary.
(h) Anti-Abuse Rule
The regulations to be issued under §1.367(b)-3 will include an anti-abuse rule to

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address transactions engaged in with a view to avoid the purposes of the rules
described in this Section 4.03. Under the anti-abuse rule, adjustments must be made,
including by disregarding the effects of transactions, to carry out the purposes of this
section. Thus, as one 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 in 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.
.04 Nonqualified Preferred Stock
The definition of property provided in §1.367(b)-10(a)(3)(ii) will be modified to
include S stock that is nonqualified preferred stock (as defined in section 351(g)(2)).
.05 Examples
The following examples illustrate certain modifications to the final regulations
described in this Section 4:
Example 1. (i) Facts. USP, a domestic corporation, wholly owns FP and USS.
FP is a foreign corporation that wholly owns FS, a foreign corporation. USS is a
domestic corporation that wholly owns FT, a foreign corporation. USS owns 100 shares
of FT stock, 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 in exchange for $40x of common
stock of FS and $60x cash. FS acquires all of the stock of FT held by USS solely in
exchange for the $100x of FP voting stock in a triangular reorganization described in
section 368(a)(1)(B).

(ii) Analysis. The triangular reorganization is described in §1.367(b)-10(a).
Pursuant to §1.367(b)-10(b)(1), as modified by the rules announced in the 2014 notice,

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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
$60x of FP stock used in the triangular reorganization. The $60x deemed distribution
from FS to FP results in $60x dividend income to FP under section 301(c)(1) that is not
subpart F income under section 954(c)(6). Pursuant to Section 4.01 of this notice,
§1.367(b)-4 (as modified by Section 4.02 of this notice), rather than section 367(a)(1),
applies to the $60x of FT stock exchanged for the $60x of FP stock acquired by FS
from FP in exchange for $60x cash. Thus, USS must include in income a $30x deemed
dividend ($50x section 1248 amount x 60%) with respect to the FT stock exchanged for
FP stock that was acquired by FS from FP for $60x cash. In addition, USS must
recognize the remaining $18x gain ($48x gain (($80x gain x 60%) - $30x deemed
dividend) realized with respect to such FT stock. If USS properly files a gain
recognition agreement pursuant to §§1.367(a)-3(b)(2) and 1.367(a)-8, USS does not
recognize gain under section 367(a)(1) with respect to the $40x of FT stock exchanged
for FP stock that was acquired by FS from FP in exchange for the $40x of FS common
stock.

Example 2. (i) Facts. USP, a domestic corporation, owns 90% of the stock of
FP, a foreign corporation. The remaining 10% of the stock of FP is owned by FI, a
nonresident alien individual unrelated to USP. FP is a foreign corporation that wholly
owns FS1, a foreign corporation, which, in turn, wholly owns FS2, a foreign corporation.
The FP stock owned by USP has a fair market value of $90x and an adjusted basis of
$17x. The FP stock owned by FI has a fair market value of $10x and an adjusted basis
of $6x. The all earnings and profits amount with respect to USP’s FP stock, determined
without regard to this notice, is $27x. The assets of FP have an adjusted basis of $78x,
FP has no liabilities, and the earnings and profits of FP attributable to the outstanding
FP stock is $30x (in this case, as determined under the principles of §1.367(b)-2(d) but
without regard to whether USP and FI are exchanging shareholders described in
§1.367(b)-3(b)(1) or U.S. or foreign persons). The earnings and profits of FS1 and FS2
attributable to the FP stock owned by USP under section 1248(c)(2) (as determined
under the principles of §1.367(b)-2(d)(2) and (d)(3)(i)) are $80x and ($20x) respectively.
In a reorganization described in section 368(a)(1)(F), US Newco, a newly-formed
domestic corporation that is wholly owned by USP, acquires all of the assets of FP
solely in exchange for stock of US Newco. No adjustment under Section 4.03(g) of this
notice is appropriate.

(ii) Analysis--(A) All earnings and profits amount. Under §1.367(b)-3(b)(3), USP
must include in income as a deemed dividend the all earnings and profits amount with
respect to its FP stock. Pursuant to Section 4.03 of this notice, the all earnings and
profits amount of $27x, determined without regard to this notice, is increased by the
specified earnings of FP, because there is excess asset basis with respect to FP

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determined as follows.

(B) Excess asset basis. The amount of the excess asset basis is $25x, the
amount that the inside asset basis of FP ($78x) exceeds the sum of (i) the earnings and
profits of FP ($30x), (ii) the aggregate basis in all of the FP stock ($23x), and (iii) the
liabilities of FP assumed by US Newco ($0x).

(C) Specified earnings. The specified earnings with respect to the stock of FP
exchanged by USP equals $23x, the lesser of the following amounts (but not below
zero) (i) $60x, the sum of the earnings and profits (including deficits) with respect to
FS1 and FS2 attributable under section 1248(c)(2) to the stock of FP exchanged by
USP; (ii) $23x, the product of the excess asset basis with respect to FP ($25x),
multiplied by USP’s specified percentage (92%), determined based on a fraction, the
numerator of which is USP’s specified stock gain ($46x), and the denominator of which
is the sum of the aggregate of the specified stock gain and gain realized with respect to
FP stock ($50x), and (iii) $46x, USP’s specified stock gain, which is the amount of gain
that would be realized by USP if immediately before the inbound transaction USP had
sold the stock of FP for fair market value ($73x), reduced by USP’s all earnings and
profits amount (determined without regard to the modifications described in this notice)
($27x).

(D) All earnings and profits amount, as modified by this notice. The all earnings
and profits amount that USP must include in income as a deemed dividend is $50x
($27x + $23). Under §1.367(b)-2(e)(2), $23x of the deemed dividend is determined by
reference to the earnings and profits of FS1 and is considered as having been paid by
FS1 to USP through FP. Under §1.367(b)-2(e)(3)(ii), immediately before the exchange,
USP’s basis in the stock of FP is increased by the amount of the $50x deemed dividend
for purposes of determining USP’s basis in its stock of US Newco. However, the basis
increase under §1.367(b)-2(e)(3)(ii) is not taken into account for purposes of calculating
USP’s all earnings and profits amount, as modified by Section 4.03 of this notice.

SECTION 5. EFFECTIVE DATE
The regulations described in Section 4 of this notice will apply to transactions
completed on or after December 2, 2016, and to any inbound 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. No
inference is intended regarding the treatment of transactions described in Section 3 of

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this notice under current law. For example, these transactions are currently subject to
challenge under the anti-abuse rule.
SECTION 6. COMMENTS
The Treasury Department and the IRS request comments on the rules described
in this notice. In particular, §1.367(b)-10(b)(3) currently provides that the deemed
distribution described in §1.367(b)-10(b)(1) is treated as occurring immediately before
the P acquisition. Comments are requested on whether, in light of the modifications
announced by this notice, it may be more appropriate (in particular, when T is a foreign
corporation) to treat the deemed distribution as occurring immediately after, rather than
before, the triangular reorganization. In addition, comments are requested as to
whether any specific adjustments to excess asset basis should be allowed, or not
allowed, consistent with the principles underlying Section 4.03 of this notice. Finally,
comments are requested as to whether there are transactions other than those
described in Section 3 of this notice that may give rise to excess asset basis.
Written comments may be submitted to the Office of Associate Chief Counsel
(International), Attention: Lynlee Baker, Internal Revenue Service, IR-4554, 1111
Constitution Avenue, NW, Washington, DC 20224. Alternatively, taxpayers may submit
comments electronically to Notice.comments@irscounsel.treas.gov. Comments will be
available for public inspection and copying. Written or electronic comments must be
received by March 2, 2017.
SECTION 7. DRAFTING INFORMATION

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The principal author of this notice is Lynlee Baker of the Office of Associate
Chief Counsel (International). However, other personnel from the Treasury Department
and the IRS participated in its development. For further information regarding this
notice, contact Ms. Baker at (202) 317-6937 (not a toll-free call).