n-06-46.pdf

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Part III - Administrative, Procedural, and Miscellaneous

Announcement of rules to be included in final regulations under sections 897(d) and (e)
of the Code

Notice 2006-46

PURPOSE

This notice announces that the Internal Revenue Service (IRS) and the Treasury
Department (Treasury) will issue final regulations under sections 897(d) and (e) of the
Internal Revenue Code (Code) that set forth and, to the extent described in this notice,
revise, the current rules under sections 1.897-5T and 1.897-6T of the temporary income
tax regulations and Notice 89-85, 1989-2 C.B. 403, regarding certain transactions
involving the transfer of U.S. real property interests (USRPIs), as defined in section
897(c)(1) of the Code. When issued, the regulations will revise the rules of Notice 89-
85 and Temp. Treas. Reg. § 1.897-5T(c)(4) relating to inbound asset reorganizations
described in section 368(a)(1)(C), (D), or (F) to take into account statutory mergers and
consolidations described in section 368(a)(1)(A). The final regulations will also revise
the rules of Temp. Treas. Reg. § 1.897-6T(b)(1) to take into account foreign-to-foreign
statutory mergers and consolidations described in section 368(a)(1)(A) and to create
two additional exceptions that provide a foreign corporation with nonrecognition
treatment on its transfer of a USRPI in certain foreign-to-foreign asset reorganizations.
Moreover, the final regulations will incorporate a revised version of Temp. Treas. Reg. §

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1.897-6T(b)(1)(iii). The final regulations will eliminate all the conditions required for
nonrecognition treatment in Temp. Treas. Reg. § 1.897-6T(b)(2). Finally, the final
regulations will modify the period that must be considered for imposing taxes and
accrued interest on prior dispositions of the stock of foreign corporations under Temp.
Treas. Reg. § 1.897-5T(c)(2), (4), and Treas. Reg. §1.897-3(c)(5), (d).
The portion of the final regulations that will address distributions, transfers, or
exchanges occurring in the context of a statutory merger or consolidation described in
section 368(a)(1)(A) will generally apply to distributions, transfers, or exchanges
occurring on or after January 23, 2006. Final regulations regarding the revisions to
Temp. Treas. Reg. §1.897-5T(c)(2), (4), Treas. Reg. §1.897-3(c)(5), (d), and Temp.
Treas. Reg. § 1.897-6T(b), except as such regulations are applicable to exchanges in
section 368(a)(1)(A) reorganizations, will apply to distributions, transfers, or exchanges
occurring on or after May 23, 2006. However, taxpayers may choose to apply these
regulatory changes to all dispositions, transfers, or exchanges occurring before May 23,
2006 during any taxable year that is not closed by the period of limitations, provided
they do so consistently with respect to all such dispositions, transfers, and exchanges.
BACKGROUND
Under section 897(a), the disposition of a USRPI by a nonresident alien
individual or a foreign corporation is taxable as effectively connected income under
section 871(b)(1) or section 882(a)(1), respectively, as if the taxpayer were engaged in
a trade or business within the United States during the taxable year and the gain or loss
were effectively connected with the trade or business.

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Section 897(c)(1) generally defines a USRPI to include any interest (other than
an interest solely as a creditor) in any domestic corporation, unless the taxpayer
establishes that such corporation was not a U.S. real property holding corporation
(USRPHC) at any time during the shorter of the period the taxpayer held such interest
or the 5-year period ending on the date of the disposition of such interest. Under
section 897(c)(2), a USRPHC is defined as any corporation if the fair market value of its
USRPIs equals or exceeds 50-percent of the sum of the fair market value of (i) its
USRPIs, (ii) its real property interests located outside of the United States, and (iii) any
of its other assets used or held for use in a trade or business.
Under section 897(d)(1), except to the extent provided in regulations, gain is
recognized by a foreign corporation on the distribution (including a distribution in
liquidation or redemption) of a USRPI in a transaction that otherwise qualifies for
nonrecognition under the Code. Section 897(d)(2) provides that gain is not recognized
under section 897(d)(1) if either: (i) at the time of the receipt of the distributed property,
the distributee would be subject to taxation on a subsequent disposition of the
distributed property, and the basis of the distributed property in the hands of the
distributee is not greater than the adjusted basis of such property before the distribution,
increased by the amount of gain (if any) recognized by the distributing corporation; or (ii)
nonrecognition treatment is provided for in regulations prescribed by the Secretary
under section 897(e)(2). Temp. Treas. Reg. § 1.897-5T provides rules, exceptions, and
limitations regarding section 897(d) distributions in the context of sections 332, 355, and
361. See Temp. Treas. Reg. § 1.897-5T(c)(2), (3), and (4). Notice 89-85 announced

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rules that would revise the application of certain of the exceptions set forth in the
temporary regulations. As relevant to the changes announced in this notice, the
provisions of those regulations and Notice 89-85 are discussed below.
Subject to the rules of section 897(d) and any regulations issued under section
897(e)(2), section 897(e)(1) provides that any nonrecognition provision will apply only in
the case of an exchange of a USRPI for an interest the sale of which would be taxable
under Chapter 1 of the Code. Under section 897(e)(2), Treasury has authority to
prescribe regulations providing the extent to which nonrecognition provisions shall apply
to transfers of USRPIs.
Pursuant to section 897(e)(2), Temp. Treas. Reg. § 1.897-6T(a)(1) states the
general rule of section 897(e) and imposes certain requirements for nonrecognition.
Among other things, that regulation provides that except as otherwise provided in Temp.
Treas. Reg. §§ 1.897-5T and -6T, any nonrecognition provision applies to a transfer by
a foreign person of a USRPI on which gain is realized only to the extent that the
transferred USRPI is exchanged for a USRPI which, immediately following the
exchange, would be subject to U.S. taxation upon its disposition, and the transferor
complies with the filing requirements of Temp. Treas. Reg. § 1.897-5T(d)(1)(iii). Temp.
Treas. Reg. § 1.897-6T(b) provides exceptions to this rule for certain exchanges in
foreign-to-foreign nonrecognition transactions. The exceptions described in Temp.
Treas. Reg. § 1.897-6T(b) are discussed below in the context of the changes
announced by this notice to such provisions.
The IRS and Treasury issued final regulations on January 23, 2006, concerning

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statutory mergers and consolidations described in section 368(a)(1)(A). See T.D. 9242,
2006-7 I.R.B. 422 (February 13, 2006). Treasury Decision 9242 provides a revised
definition of the term “statutory merger or consolidation” that permits transactions
effected pursuant to the statutes of a foreign jurisdiction or of a United States
possession to qualify as a statutory merger or consolidation. Further, that regulation
generally applies to transactions occurring on or after January 23, 2006. Prior to the
issuance of T.D. 9242, temporary regulations defined a statutory merger or
consolidation as including only transactions effected pursuant to the laws of the United
States or a State or the District of Columbia.
DISCUSSION

The IRS and Treasury have determined that the rules of Notice 89-85 and Temp.
Treas. Reg. §§ 1.897-5T(c) and 1.897-6T(b) should be revised to reflect the recently
issued regulations under section 368(a)(1)(A). This action is necessary because Notice
89-85 and the temporary regulations did not contemplate statutory mergers or
consolidations under foreign or possessions law as qualifying under section
368(a)(1)(A). In addition, the IRS and Treasury believe that certain other changes to
the scope of the rules under Treas. Reg. § 1.897-3 and Temp. Treas. Reg. §§ 1.897-5T
and -6T are appropriate. Accordingly, this notice announces that the IRS and Treasury
will issue final regulations under sections 897(d), (e), and (i) that generally incorporate
the rules of Treas. Reg. § 1.897-3 and Temp. Treas. Reg. §§ 1.897-5T and -6T, and
Notice 89-85, except as described below.
1. Revision to the rules of Temp. Treas. Reg. § 1.897-5T(c)(4) relating to inbound asset

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reorganizations

Temp. Treas. Reg. § 1.897-5T(c)(4) applies the rules of section 897(d) to certain
distributions of stock of a USRPHC by a foreign corporation under section 361(c).
Under the temporary regulations, a foreign corporation that transfers property to a
domestic corporation (that is a USRPHC immediately after the transfer) in an exchange
under section 361(a) or (b) pursuant to a reorganization under section 368(a)(1)(C), (D),
or (F) must recognize gain under section 897(d)(1) and Temp. Treas. Reg. § 1.897-
5T(c)(4)(i) when it distributes the stock of the USRPHC to its shareholders under
section 361(c). Temp. Treas. Reg. § 1.897-5T(c)(4)(ii) and (iii) provide an exception
and a limitation to this gain recognition.
In Notice 89-85, the IRS and Treasury announced that the exception and the
limitation set forth in Temp. Treas. Reg. § 1.897-5T(c)(4)(ii) and (iii) would be replaced
by a new exception. The new exception announced in Notice 89-85 provides that
recognition of gain will not be required on the distribution under section 361(c)(1) of the
stock of the USRPHC under Temp. Treas. Reg. § 1.897-5T(c)(4)(i) if the foreign
corporation pays an amount equal to any taxes that section 897 would have imposed
upon all persons who had disposed of interests in the transferor foreign corporation (or
a corporation from which such assets were acquired in a transaction described in
section 381) after June 18, 1980, as if it were a domestic corporation on the date of
each such disposition, and if the conditions of Temp. Treas. Reg. § 1.897-5T(c)(4)(ii)(A)
and (C) (relating to the distributee being subject to tax on a subsequent disposition and
certain filing requirements) are met. Other requirements relating to the time and

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manner of payment of tax and interest are also set forth in the notice. The revisions
announced in Notice 89-85 generally apply to all distributions of stock under Temp.
Treas. Reg. § 1.897-5T(c)(4) occurring after July 31, 1989.
The IRS and Treasury have determined that when final regulations are issued,
inbound statutory mergers and consolidations described in section 368(a)(1)(A)
(including such reorganizations by reason of 368(a)(2)(D) or (E)) will be subject to the
same rules set forth in Temp. Treas. Reg. § 1.897-5T(c)(4) and Notice 89-85 that apply
to other inbound asset reorganizations. Further, as described in part 2, below, the
period that a foreign corporation must consider with respect to prior stock dispositions
under Temp. Treas. Reg. § 1.897-5T(c)(4) will be revised.
2. Revisions to the Notice 89-95 stock disposition look-back period applicable to Temp.
Treas. Reg. § 1.897-5T(c)(2)(ii) liquidations, Temp. Treas. Reg. § 1.897-5T(c)(4)
inbound asset reorganizations, and section 897(i) elections.

Section 1.897-5T(c)(2) of the temporary regulations applies the rules of section
897(d) to liquidating distributions of USRPIs by a foreign corporation to a domestic
corporation pursuant to section 332(a). Under Temp. Treas. Reg. § 1.897-5T(c)(1), a
foreign corporation that makes a liquidating distribution of a USRPI to a foreign or
domestic shareholder must recognize gain on the distribution under section 897(d),
unless the distribution comes within an exception described in Temp. Treas. Reg. §
1.897-5T(c)(2), (3), or (4). Temp. Treas. Reg. § 1.897-5T(c)(2)(i) and (ii) provide
exceptions to this recognition rule that are applicable to liquidating distributions under
section 332(a).
In Notice 89-85, the IRS and Treasury announced that the exceptions set forth in

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Temp. Treas. Reg. § 1.897-5T(c)(2)(i) and (ii) would be replaced by a new exception.
The new exception announced in Notice 89-85 provides that recognition of gain shall
not be required on the liquidating distribution of a USRPI by a foreign corporation to a
domestic corporation meeting the stock ownership requirements of section 332(b) in a
section 332(a) liquidation if the distributing foreign corporation pays the tax and interest
on any prior disposition of its stock (or stock of a corporation from which such assets
were acquired in a transaction described in section 381) after June 18, 1980, as if it
were a domestic corporation on the date of such dispositions, and if the conditions of
Temp. Treas. Reg. § 1.897-5T(c)(2)(i) are met (relating to the distributee being subject
to tax on a subsequent disposition and certain basis carryover and filing requirements).
The revisions announced in Notice 89-85 generally apply to all distributions of stock
under Temp. Treas. Reg. § 1.897-5T(c)(2) occurring after July 31, 1989. Similarly, as
described in part 1 of this notice, above, Notice 89-85 revised the look-back period
applicable to inbound reorganizations under Temp. Treas. Reg. § 1.897-5T(c)(4) to
encompass certain dispositions of the stock of the foreign corporation that occur after
June 18, 1980. The rules of Notice 89-85 also require the payment of interest, as
determined under section 6621, that would have accrued had tax actually been due with
respect to the prior stock dispositions.
Further, section 897(i), which permits a foreign corporation to elect to be treated
as a domestic corporation for purposes of section 897, requires as a condition to
making the election that the electing foreign corporation verify that no interest in the
corporation was disposed of during the shorter of: (1) the period from June 19,1980

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through the date of the election, (2) the period from the date on which the corporation
first holds a USPRI through the date of the election, or (3) the five year period ending on
the date of the election. See Treas. Reg. § 1.897-3(c)(5). If the foreign corporation
cannot make such verification, then it must comply with the conditions of Treas. Reg. §
1.897-3(d) which, among other things, requires the payment of an amount equal to any
taxes that section 897 would have imposed on all persons who had disposed of
interests in the corporation during such period. The payment must also include any
interest, as determined under section 6621, that would have accrued had the tax
actually been due with respect to the dispositions. These rules were modified by Notice
89-85 to require the reporting and payment of tax and accrued interest on all
dispositions of stock occurring after June 18, 1980 that would have been subject to
taxation under section 897(a).
The IRS and Treasury have determined that when final regulations are issued,
the look-back, tax, and interest payment periods applicable under Notice 89-85 to
Temp. Treas. Reg. § 1.897-5T(c)(2) liquidating distributions, Temp. Treas. Reg. §
1.897-5T(c)(4) inbound asset reorganizations, and section 897(i) elections will be
modified as described below.
Regarding distributions of USRPIs by a foreign corporation to a domestic
corporation in a section 332 liquidation, the final regulations will amend the rules of
Temp. Treas. Reg. § 1.897-5T(c)(2)(ii) and Notice 89-85 to provide that recognition of
gain will not be required on the distribution of any USRPI by the distributing foreign
corporation to the domestic corporation if the distributing foreign corporation pays an

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amount equal to the tax and interest that would have been imposed upon all persons
who disposed of an interest in the foreign corporation (or a corporation from which such
assets were acquired in a transaction described in section 381) during the period
beginning on the date that is 10 years prior to the date on which the domestic
corporation or any related person (within the meaning of section 267(b)) is in control (as
determined under section 304(c)) of the liquidating foreign corporation, and ending on
the date of the liquidation, as if the foreign corporation were a domestic corporation on
the date of each such disposition and if the conditions of Temp. Treas. Reg. § 1.897-
5T(c)(2)(i) are met.
Regarding inbound asset acquisitions described in Temp. Treas. Reg. § 1.897-
5T(c)(4) as modified by this notice, the final regulations will amend the rules of Temp.
Treas. Reg. § 1.897-5T(c)(4)(ii) and Notice 89-85 to provide that recognition of gain will
not be required on the distribution of stock of a USRPHC if the foreign corporation pays
an amount equal to any taxes and interest that would have been imposed upon all
persons who disposed of an interest in the foreign corporation (or a corporation from
which the assets were acquired in a transaction described in section 381) during the
applicable period as if the foreign corporation were a domestic corporation on the date
of each such disposition, and the conditions of Temp. Treas. § 1.897-5T(c)(4)(ii)(A) and
(C) are met. The applicable period means the earliest of either:
• The period beginning on the date that is 10 years prior to the date on which the
acquiring domestic corporation or a related person (within the meaning of section

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267(b)) is in control (as determined under section 304(c)) of the foreign
corporation and ending on the date of the reorganization. For purposes of the
preceding sentence, the acquiring domestic corporation means the domestic
corporation that is the transferee in the 361(a) exchange; or
• The period beginning on the date that is 10 years prior to the date of the
reorganization and ending on the date of the reorganization.
Regarding the revisions to Treas. Reg. §1.897-3(c)(5), and (d) pertaining to a
foreign corporation’s election under section 897(i), the final regulations will provide that
the applicable period will be the earliest of either:
• The period beginning on the date that is 10 years prior to the date on which one
or more domestic shareholders or related persons (within the meaning of section
267(b)) are in control (as determined under section 304(c)) of the foreign
corporation and ending on the date of the election; or
• The period beginning on the date that is 10 years prior to the date of the section
897(i) election and ending on the date of the election.
3. Revisions to the rules of Temp. Treas. Reg. § 1.897-6T

(a) Revision to the rules of Temp. Treas. Reg. § 1.897-6T(b)(1)(ii) to take into
account statutory mergers and consolidations described in section
368(a)(1)(A)

As noted above, Temp. Treas. Reg. § 1.897-6T(a)(1) generally provides that any
nonrecognition provision shall apply to a transfer by a foreign person of a USRPI only to

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the extent that the foreign person receives a USRPI in such exchange. Pursuant to the
regulatory authority under section 897(e)(2) of the Code, Temp. Treas. Reg. § 1.897-
6T(b)(1) and (2) provide exceptions to the rule of Temp. Treas. Reg. § 1.897-6T(a)(1)
for certain foreign-to-foreign reorganizations and certain exchanges under section 351
where a foreign person transfers a USRPI for stock in a foreign corporation. These
exceptions require that (1) the transferee’s subsequent disposition of the transferred
USRPI be subject to U.S. income taxation in accordance with Temp. Treas. Reg. §
1.897-5T(d)(1); (2) the filing requirements of Temp. Treas. Reg. § 1.897-5T(d)(1)(iii) be
satisfied; (3) one of the five conditions set forth in paragraph (b)(2) exists; and (4) the
exchange takes one of the three forms of exchange described in paragraph (b)(1).
Temp. Treas. Reg. § 1.897-6T(b)(1)(ii) describes one of the three permissible
forms of exchange referenced above. That paragraph describes an exchange by a
foreign corporation pursuant to section 361(a) or (b) in a reorganization described in
section 368(a)(1)(C), where there is an exchange of the transferor corporation stock for
the transferee corporation stock (or stock of the transferee corporation’s parent in the
case of a parenthetical C reorganization) under section 354(a), and the transferor
corporation’s shareholders own more than fifty percent of the voting stock of the
transferee corporation (or stock of the transferee corporation’s parent in the case of a
parenthetical C reorganization) immediately after the reorganization. The fifty percent
limitation restricts this exception to reorganizations described in section 368(a)(1)(C)
that are restructurings where the transferor corporation shareholders control the
transferee corporation after the transaction (e.g., internal restructurings).

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The IRS and Treasury have determined that when final regulations are issued,
foreign-to-foreign statutory mergers and consolidations described in section
368(a)(1)(A) (including such reorganizations by reason of section 368(a)(2)(D) or (E))
will be subject to the same rules set forth in Temp. Treas. Reg. § 1.897-6T(b)(1)(ii) that
apply to foreign-to-foreign reorganizations described in section 368(a)(1)(C) (including
parenthetical C reorganizations). The exception for statutory mergers and
consolidations described in section 368(a)(1)(A) will be limited to restructurings where
the 50 percent control requirement is satisfied after the transaction. Further, the final
regulations will provide that in determining whether the fifty percent requirement set
forth in Temp. Treas. Reg. § 1.897-6T(b)(1)(ii) is met where the transferee corporation
owns more than fifty percent of the transferor corporation before a reorganization under
section 368(a)(1)(A) or 368(a)(1)(C) (i.e., an upstream reorganization), the shareholders
of the transferee corporation before the reorganization (that continue to be shareholders
of the transferee corporation after the reorganization) will be treated as shareholders of
the transferor corporation before the reorganization to the extent of their indirect interest
in the stock of the transferor corporation (owned by the transferee corporation) before
the reorganization.
Accordingly, when issued, the final regulations will provide that gain shall not be
recognized where an exchange is made by a foreign corporation pursuant to section
361(a) or (b) in a reorganization described in section 368(a)(1)(A) (including such
reorganization by reason of section 368(a)(2)(D) or (E)); there is an exchange of the
transferor corporation stock for the transferee corporation stock (or the stock of the

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transferee corporation’s parent in the case of a reorganization by reason of section
368(a)(2)(D)) under section 354(a); immediately after the reorganization, the transferor
corporation’s shareholders own more than fifty percent of the voting stock of the
transferee corporation (or the transferee corporation’s parent in a reorganization by
reason of section 368(a)(2)(D)), or in the case of a reorganization by reason of section
368(a)(2)(E), the shareholders of the corporation that controls the transferor corporation
before the reorganization own more than fifty percent of the voting stock of that
controlling corporation after the reorganization; and the other requirements of Temp.
Treas. Reg. § 1.897-6T(b)(1) are satisfied.
(b) Additional exceptions to be added to the rules of Temp. Treas. Reg. § 1.897-
6T(b)(1)
The IRS and Treasury have determined that when final regulations are issued,
the rules of Temp. Treas. Reg. § 1.897-6T(b)(1) will be expanded to include two
additional exceptions. Those exceptions will apply only in certain foreign-to-foreign
statutory mergers and consolidations described in section 368(a)(1)(A) (including such
reorganizations by reason of section 368(a)(2)(D) or (E)) and foreign-to-foreign
reorganizations described in section 368(a)(1)(C) (including parenthetical C
reorganizations). Accordingly, the new exceptions to be incorporated in the final
regulations will revise the rules of Temp. Treas. Reg. § 1.897-6T(b)(1) to provide that
such foreign-to-foreign reorganizations will be excepted from the general gain
recognition rule of Temp. Treas. Reg. § 1.897-6T(a)(1) provided that the other
requirements set forth in Temp. Treas. Reg. § 1.897-6T(b)(1) are met. The two

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additional exceptions apply where an exchange is made by a foreign corporation
pursuant to section 361(a) or (b) in a reorganization described in section 368(a)(1)(A)
(including a reorganization by reason of section 368(a)(2)(D) or (E)) or section
368(a)(1)(C) (including parenthetical C reorganizations); there is an exchange of the
transferor corporation stock for the transferee corporation stock (or the transferee
corporation’s parent in the case of a reorganization by reason of section 368(a)(2)(D) or
a parenthetical C reorganization) under section 354(a); and either:
• Stock in the transferor corporation (including a predecessor corporation in a
transaction described in section 381(a)) would not be a USRPI at any time
within the five year period ending on the date of the reorganization if the
transferor corporation were a domestic corporation; or
• Regarding reorganizations under section 368(a)(1)(A) (other than by reason
of section 368(a)(2)(D) or (E)) or section 368(a)(1)(C) (other than
parenthetical reorganizations described in that section): prior to the exchange
the stock of the transferor corporation and the stock of the transferee
corporation, and after the exchange the stock of the transferee corporation
are regularly traded under Treas. Reg. § 1.897-1(n) and Temp. Treas. Reg. §
1.897-9T(d)(1) and (2) on an established securities market under § 1.897-
1(m), and in the case where the transferor corporation would have been a
USRPHC at any time within the five year period ending on the date of the
reorganization if the transferor corporation had been a domestic corporation,
no foreign shareholder of the transferor corporation owned a more than five

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percent interest in the transferor corporation at such time under the rules of
Treas. Reg. § 1.897-1(c)(2)(iii) and Temp. Treas. Reg. § 1.897-9T.
Regarding parenthetical C reorganizations and reorganizations under
section 368(a)(1)(A) by reason of section 368(a)(2)(D): prior to the exchange
the stock of the transferor corporation and the stock of the corporation in
control of the transferee corporation, and after the exchange the stock of the
corporation in control of the transferee corporation are regularly traded under
Treas. Reg. § 1.897-1(n) and Temp. Treas. Reg. § 1.897-9T(d)(1) and (2) on
an established securities market under § 1.897-1(m), and in the case where
the transferor corporation would have been a USRPHC at any time within the
five year period ending on the date of the reorganization if the transferor
corporation had been a domestic corporation, no foreign shareholder of the
transferor corporation owned a more than five percent interest in the
transferor corporation at such time under the rules of Treas. Reg. § 1.897-
1(c)(2)(iii) and Temp. Treas. Reg. § 1.897-9T.
Regarding reorganizations under section 368(a)(1)(A) by reason of section
368(a)(2)(E): prior to the exchange the stock of the transferee corporation and
the stock of the corporation in control of the transferor corporation, and after
the exchange the stock of the corporation that controls the transferee
corporation are regularly traded under Treas. Reg. § 1.897-1(n) and Temp.
Treas. Reg. § 1.897-9T(d)(1) and (2) on an established securities market
under § 1.897-1(m), and in the case where the transferor corporation or the

17

corporation in control of the transferor corporation would have been a
USRPHC at any time within the five year period ending on the date of the
reorganization if either corporation had been a domestic corporation, no
foreign shareholder of the corporation in control of transferor corporation
owned a more than five percent interest in the transferor corporation at such
time under the rules of Treas. Reg. § 1.897-1(c)(2)(iii) and Temp. Treas. Reg.
§ 1.897-9T.
(c) Revision to the rules of Temp. Treas. Reg. § 1.897-6T(b)(1)(iii) relating to
foreign-to-foreign section 351 transactions and section 368(a)(1)(B) reorganizations

As discussed above, Temp. Treas. Reg. § 1.897-6T(b)(1) contains exceptions to
the general rule provided in Temp. Treas. Reg. § 1.897-6T(a)(1) if one of three forms of
exchange occurs and certain other requirements are met. Specifically, Temp. Treas.
Reg. § 1.897-6T(b)(1)(iii) provides a foreign person with nonrecognition treatment if the
foreign person exchanges stock in a USRPHC under section 351(a) or section 354(a) in
a reorganization described in section 368(a)(1)(B), and, immediately after the exchange,
all of the outstanding stock of the transferee corporation (or the stock of the transferee
corporation’s parent in the case of a parenthetical B reorganization) is owned in the
same proportions by the same nonresident alien individuals and foreign corporations
that immediately before the exchange owned the stock of the USRPHC. However, if
any of the stock in the foreign corporation received by the individual or corporate
transferor in the exchange is disposed of within three years from the date of its receipt,
then the transferor must recognize that portion of the realized gain with respect to the

18

stock of the USPRHC for which the foreign stock disposed of was received.
The IRS and Treasury have determined that the final regulations will revise
Temp. Treas. Reg. § 1.897-6T(b)(1)(iii) in two respects. First, the exception will be
revised so that “all of the stock of the transferee corporation” is removed and replaced
with “substantially all of the outstanding stock of the transferee corporation” and the
words “in the same proportions” will be removed. Second, the three year period will be
revised to one year.
(d) Removal of the conditions set forth in Temp. Treas. Reg. § 1.897-6T(b)(2)
As discussed above, to come within an exception to Temp. Treas. Reg. § 1.897-
6T(a)(1), not only must an exchange be described in Temp. Treas. Reg. § 1.897-
6T(b)(1), but it must also satisfy one of the five conditions set forth in Temp. Treas. Reg.
§ 1.897-6T(b)(2). The IRS and Treasury have determined that the conditions of Temp.
Treas. Reg. § 1.897-6T(b)(2) are no longer necessary. Accordingly, the final
regulations will eliminate the conditions of Temp. Treas. Reg. § 1.897-6T(b)(2).
COMMENTS
Written comments on issues addressed in this notice may be submitted to the
Office of Associate Chief Counsel International, Attention: Margaret Hogan (Notice
2006-46) , room 4567, CC:INTL:B04, Internal Revenue Service, 1111 Constitution
Avenue, NW, Washington, DC 20224. Alternatively, taxpayers may submit comments
electronically to
Notice.Comments@m1.irscounsel.treas.gov Comments will be
available for public inspection and copying.
EFFECTIVE DATE

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Final regulations to be issued incorporating the guidance set forth in this notice
regarding exchanges occurring in the context of a statutory merger or consolidation
described in section 368(a)(1)(A) will generally apply to distributions, transfers, or
exchanges occurring on or after January 23, 2006. Final regulations regarding the
revisions to Temp. Treas. Reg. §§ 1.897-5T(c)(2), (4), Treas. Reg. §1.897-3(c)(5), (d),
and Temp. Treas. Reg. § 1.897-6T(b), except as applicable to section 368(a)(1)(A)
transactions, will apply to distributions, transfers, or exchanges occurring on or after
May 23, 2006. However, taxpayers may choose to apply these regulatory changes to
all dispositions, transfers, or exchanges occurring before May 23, 2006 during any
taxable year that is not closed by the period of limitations, provided they do so
consistently with respect to all dispositions, transfers, and exchanges.
Prior to the issuance of the final regulations, taxpayers may rely on the guidance
contained in this notice. Taxpayers applying this notice, however, must do so
consistently with respect to all transactions within its scope.
PAPERWORK REDUCTION ACT
The collections of information contained in this notice have been reviewed and
approved by the Office of Management and Budget in accordance with the Paperwork
Reduction Act (44 U.S.C. § 3507) under control number 1545-2017. An agency may
not conduct or sponsor, and a person is not required to respond to, a collection of
information unless the collection of information displays a valid OMB control number.

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The rules of this notice will apply to a foreign corporation distributing stock of a
USRPHC to its shareholders pursuant to an inbound asset reorganization or a foreign
corporation transferring a USRPI to another foreign corporation pursuant to an asset
reorganization and will require such foreign corporations to satisfy the filing
requirements of Temp. Treas. Reg. § 1.897-5T(d)(1)(iii), as modified by Notice 89-57,
1989-1 C.B. 698. The specific collections of information are contained in Temp. Treas.
Reg. §§ 1.897-5T(c)(4)(ii)(C) and 1.897-6T(b)(1). These filing requirements notify the
IRS of the transfer and enable it to verify that the transferor qualifies for nonrecognition
and the transferee will be subject to U.S. tax on a subsequent disposition of the USRPI.
Generally, they may be satisfied by: (1) filing the information statement required by
Temp. Treas. Reg. § 1.897-5T(d)(1)(iii); (2) filing a notice of nonrecognition to the IRS in
accordance with the provisions of Treas. Reg. § 1.1445-2(d)(2); or (3) filing a
withholding certificate in accordance with the requirements of Treas. Reg. § 1.1445-3.
The collections of information are required in order to obtain the benefit of the
nonrecognition provisions. The likely respondents are businesses.
The estimated total annual reporting and/or recordkeeping burden is 500 hours.
The estimated annual burden hour per respondent and/or recordkeeper is 1 hour. The
estimated number of respondents and/or recordkeepers is 500. The estimated
frequency of response is occasional.
Books or records relating to a collection of information must be retained as long
as their statements may become material in the administration of any internal revenue

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law. Generally, tax returns and tax information are confidential, as required by 26
U.S.C. § 6103.
EFFECT ON OTHER DOCUMENTS

Notice 89-85, 1989-2 C.B. 403 is amplified.

DRAFTING INFORMATION

The principal author of this notice is Margaret A. Hogan of the Office of Associate
Chief Counsel (International). For further information regarding this notice contact Ms.
Hogan at (202) 622-3860 (not a toll-free call).