Guidance Under Section 355(e) Regarding Predecessors, Successors, and Limitation on Gain Recognition; Guidance Under Section 355(f)
| Published date | 18 December 2019 |
| Record Number | 2019-27110 |
| Section | Rules and Regulations |
| Court | Internal Revenue Service |
Federal Register, Volume 84 Issue 243 (Wednesday, December 18, 2019)
[Federal Register Volume 84, Number 243 (Wednesday, December 18, 2019)]
[Rules and Regulations]
[Pages 69308-69326]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2019-27110]
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DEPARTMENT OF THE TREASURY
Internal Revenue Service
26 CFR Part 1
[TD 9888]
RIN 1545-BN18
Guidance Under Section 355(e) Regarding Predecessors, Successors,
and Limitation on Gain Recognition; Guidance Under Section 355(f)
AGENCY: Internal Revenue Service (IRS), Treasury.
ACTION: Final regulations and removal of temporary regulations.
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SUMMARY: This document contains final regulations that provide guidance
regarding the distribution by a distributing corporation of stock or
securities of a controlled corporation without the recognition of
income, gain, or loss. In particular, the final regulations provide
guidance in determining whether a corporation is a predecessor or
successor of a distributing or controlled corporation for purposes of
the exception under section 355(e) of the Internal Revenue Code (Code)
to the nonrecognition treatment afforded qualifying distributions. In
addition, the final regulations provide certain limitations on the
recognition of gain in certain cases involving a predecessor of a
distributing corporation. The final
[[Page 69309]]
regulations also provide rules regarding the extent to which section
355(f) causes a distributing corporation (and in certain cases its
shareholders) to recognize income or gain on the distribution of stock
or securities of a controlled corporation. These regulations affect
corporations that distribute the stock or securities of a controlled
corporation and the shareholders or security holders of those
distributing corporations.
DATES: Effective date: These final regulations are effective on
December 16, 2019.
Applicability dates: For dates of applicability, see Sec. 1.355-
8(i).
FOR FURTHER INFORMATION CONTACT: W. Reid Thompson, (202) 317-5024, or
Richard K. Passales, (202) 317-5024 (not toll-free numbers).
SUPPLEMENTARY INFORMATION:
Background
I. Corporate Divisions Under Sections 355 and 368(a)(1)(D)
Congress enacted section 355 ``to permit the tax-free division of
existing business arrangements among existing shareholders.'' See S.
Rep. No. 105-33, at 139 (1997) (Senate Report). Under section
355(a)(1), if certain requirements are met, a corporation
(Distributing) may distribute stock, or stock and securities, of a
controlled corporation (Controlled) to Distributing's shareholders, or
to its shareholders and security holders, without recognition of gain
or loss to, or inclusion of any amount in income of, the distributees
upon receipt (Distribution). Section 355(c) generally provides that no
gain or loss is recognized to Distributing upon a Distribution of
qualified property which is not in pursuance of a plan of
reorganization. Section 355(c)(2)(B) refers to Controlled stock and
Controlled securities as ``qualified property.'' If Distributing
distributes property other than qualified property in a Distribution
and the fair market value of such property exceeds its adjusted basis,
gain is recognized to Distributing as if the property were sold to the
distributee at its fair market value. See section 355(c)(2)(A).
Taxpayers also may carry out a Distribution as part of a ``divisive
reorganization'' under section 368(a)(1)(D). A divisive reorganization
is a transfer by Distributing of part of its assets to Controlled if,
immediately after the transfer, one or more of the shareholders of
Distributing (including persons who were shareholders immediately
before the transfer) have control, as defined in section 368(c), of
Controlled, but only if, in pursuance of the plan, stock or securities
of Controlled are distributed in a Distribution. Section 361(c)
generally provides that no gain or loss is recognized to Distributing
upon a Distribution of qualified property in pursuance of a plan of
reorganization. Section 361(c)(2)(B) defines ``qualified property'' as
(i) any stock, right to acquire stock, or obligation (including a
security) of Distributing, or (ii) any stock, right to acquire stock,
or obligation (including a security) of Controlled received by
Distributing as part of the divisive reorganization. If Distributing
distributes property other than qualified property in a Distribution as
part of a divisive reorganization and the fair market value of such
property exceeds its adjusted basis, gain is recognized to Distributing
as if the property were sold to the distributee at its fair market
value. See section 361(c)(2)(A).
II. Section 355(e)
Although a Distribution is generally tax-free under sections 355
and 361, Congress has determined that recognition of corporate-level
gain by Distributing is appropriate ``[i]n cases in which it is
intended that new shareholders will acquire ownership of a business in
connection with a [Distribution],'' because the overall transaction
``more closely resembles a corporate level disposition of the portion
of the business that is acquired.'' Senate Report at 139-140.
Accordingly, the enactment of the Taxpayer Relief Act of 1997, Public
Law 105-34 (111 Stat. 788 (1997)), added section 355(e) to the Code.
Under section 355(e), stock or securities of Controlled generally will
not be treated as qualified property for purposes of section 355(c)(2)
or section 361(c)(2) if the stock or securities are distributed as part
of a plan or series of related transactions (Plan) pursuant to which
one or more persons acquire directly or indirectly stock representing a
``50-percent or greater interest'' in the stock (Planned 50-percent
Acquisition) of Distributing or Controlled. The term ``50-percent or
greater interest,'' as defined in section 355(e)(4)(A) by reference to
section 355(d)(4), means stock possessing at least 50 percent of the
total combined voting power of all classes of stock entitled to vote or
at least 50 percent of the total value of shares of all classes of
stock. Section 1.355-7(b) provides detailed guidance regarding the
meaning and determination of the existence of a Plan.
Section 355(e)(4)(D) provides that, for purposes of section 355(e),
``any reference to [Controlled] or [Distributing] shall include a
reference to any predecessor or successor of such corporation.''
However, Section 355(e) does not define the terms ``predecessor'' and
``successor.'' To provide definitions for the terms ``predecessor'' and
``successor'' for purposes of section 355(e), as well as guidance
regarding their application, the Department of the Treasury (Treasury
Department) and the IRS issued proposed regulations in 2004 (2004
Proposed Regulations) and temporary and proposed regulations in 2016
(2016 Regulations).
III. The 2004 Proposed Regulations and the 2016 Regulations
The general theory underlying the 2004 Proposed Regulations and the
2016 Regulations was that section 355(e) should apply if a Distribution
is used to combine a tax-free division of the assets of a corporation
other than Distributing or Controlled (Divided Corporation) with a
Planned 50-percent Acquisition of the Divided Corporation. The Treasury
Department and the IRS view this type of transaction as a ``synthetic
spin-off'' of the assets that are transferred by the Divided
Corporation to Distributing and then to Controlled. For example, a
synthetic spin-off could be achieved through the following series of
transactions occurring pursuant to a Plan (Base Case Example): (1) A
corporation (P) merges into Distributing in a reorganization described
in section 368(a)(1)(A), (2) Distributing contributes some (but not
all) of P's assets to Controlled in a reorganization described in
section 368(a)(1)(D), and (3) Distributing distributes all of the stock
of Controlled in a Distribution.
In the Base Case Example, the Divided Corporation (that is, P)
could have separated its assets in its own Distribution. In that case,
the Divided Corporation would have been a Distributing itself, and
section 355(e) clearly would have applied to the Distribution if it
were combined with a Planned 50-percent Acquisition of the Divided
Corporation. However, the Treasury Department and the IRS observed that
if a Distribution by a Distributing is used as the vehicle for a
synthetic spin-off by the Divided Corporation, the synthetic spin-off
would not be subject to section 355(e) unless the Divided Corporation
is treated as a predecessor of Distributing under section 355(e)(4)(D)
(Predecessor of Distributing, or POD). Accordingly, the Treasury
Department and the IRS issued the 2004 Proposed Regulations and the
2016 Regulations to treat the Divided Corporation in the Base Case
Example as a POD.
[[Page 69310]]
A. 2004 Proposed Regulations
On November 22, 2004, the Treasury Department and the IRS published
in the Federal Register (69 FR 67873) the 2004 Proposed Regulations
(REG-145535-02). In general, the 2004 Proposed Regulations would have
defined a Predecessor of Distributing as any corporation the assets of
which a Distributing has acquired in a transaction to which section
381(a) applies (Section 381 Transaction) and then divided tax-free
through a Distribution. The 2004 Proposed Regulations referred to the
Section 381 Transaction and the contribution to Controlled of some (but
not all) of the assets of the POD prior to the Distribution as a
``combining transfer'' and a ``separating transfer,'' respectively. The
Treasury Department and the IRS drafted the 2004 proposal primarily to
address combining and separating transfers carried out to effect
transactions similar to the Base Case Example (in other words,
synthetic spin-offs effectuated through Section 381 Transactions).
B. 2016 Regulations
After considering all comments received regarding the 2004 Proposed
Regulations, on December 19, 2016, the Treasury Department and the IRS
published temporary regulations (TD 9805) in the Federal Register (81
FR 91738) (2016 Temporary Regulations), which adopted the 2004 Proposed
Regulations with significant modifications. On the same day, the
Treasury Department and the IRS published in the Federal Register (81
FR 91888) a notice of proposed rulemaking (REG-140328-15) (2016
Proposed Regulations), which cross-referenced the 2016 Temporary
Regulations. A correction to the 2016 Temporary Regulations was
published in the Federal Register (82 FR 8811) on January 31, 2017.
(References to Sec. 1.355-8T in this preamble refer to the text of the
2016 Temporary Regulations as contained in 26 CFR part 1 revised as of
April 1, 2019.)
Although the 2016 Regulations generally retained the synthetic
spin-off theory underlying the 2004 Proposed Regulations, the Treasury
Department and the IRS significantly broadened the scope of the POD
definition (but also significantly narrowed its potential application,
as described later in this part III.B). Commenters on the 2004 Proposed
Regulations noted that a corporation could have been a POD only if the
corporation transferred property to Distributing in a Section 381
Transaction (such as the merger in the Base Case Example) and
questioned whether that approach was under-inclusive. In particular,
one commenter explained that a taxpayer could structure a series of
transactions to achieve many of the same tax and economic objectives as
the Base Case Example without using a Section 381 Transaction.
To illustrate that point, the commenter described the following
series of transactions, all of which occur as part of the same Plan
(2016 Preamble Example). First, Distributing (the common parent of a
consolidated group) acquires all of the stock of P. P then contributes
some (but not all) of its assets to a wholly owned subsidiary of
Distributing (Internal Distributing) in a transaction to which section
351 applies. See Sec. 1.1502-34. Thereafter, Internal Distributing (i)
contributes one of the P assets to Controlled, and (ii) distributes all
of the stock of Controlled to Distributing in a Distribution. Finally,
Distributing distributes all of the stock of Controlled in a
Distribution.
In response to these comments, the Treasury Department and the IRS
broadened the POD definition in the 2016 Regulations by removing the
requirement of a Section 381 Transaction from the definition. Under the
2016 Regulations, no particular transactional form was required;
rather, the 2016 Regulations focused on the tax-free division of the
POD's property (however effected). The Treasury Department and the IRS
revised the POD definition in this manner to ensure that section 355(e)
would apply to the Base Case Example, the 2016 Preamble Example, and
more generally to any synthetic spin-off that is combined with a
Planned 50-percent Acquisition of the Divided Corporation. Importantly,
however, the 2016 Regulations significantly limited POD treatment to
transactions in which all of the steps involved in the tax-free
division of property of the POD occur as part of a Plan. See section
355(e)(2)(A)(ii).
Because of these revisions to the 2004 Proposed Regulations, a
variety of new transactional structures resulted in POD treatment under
the 2016 Regulations. For instance, as illustrated in Sec. 1.355-
8T(h), Example 5 (Example 5), a corporation was treated as a POD as a
result of the following transactions, each of which occurs pursuant to
the same Plan. First, P transfers some (but not all) of its assets to
Distributing in exchange for 10 percent of the stock of Distributing in
a transaction to which section 351 applies (leaving Distributing's
other shareholder, Y, with 90 percent of Distributing's stock).
Distributing then (i) contributes some (but not all) of the P assets to
Controlled in a reorganization described in section 368(a)(1)(D), and
(ii) distributes all of the stock of Controlled to P and Y pro rata.
Finally, individual Z acquires 51 percent of the P stock. Because the
assets of P were divided tax-free as part of a Plan, the 2016
Regulations treated P as a POD. As described in part II of the Summary
of Comments and Explanation of Revisions, in response to comments, the
Treasury Department and the IRS have further limited the scope of the
POD definition in the final regulations to ensure that P will not be
treated as a POD in Example 5.
In expanding the definition of a Predecessor of Distributing, the
2016 Regulations introduced the term ``Potential Predecessor.'' See
Sec. 1.355-8T(b)(2)(ii). Under the POD definition in the 2016
Regulations, only a Potential Predecessor could be a POD. See Sec.
1.355-8T(b)(1)(i). Thus, if a corporation were not a Potential
Predecessor, it could not have been a POD under the 2016 Regulations.
The 2016 Regulations defined a Potential Predecessor as any corporation
other than Distributing or Controlled. See Sec. 1.355-8T(b)(2)(ii).
Summary of Comments and Explanation of Revisions
Comments were received regarding the 2016 Regulations, but no
public hearing was requested or held. After consideration of these
comments, this Treasury decision adopts the 2016 Proposed Regulations
with limited modifications, and it removes the 2016 Temporary
Regulations. In general, the final regulations follow the approach of
the 2016 Regulations while incorporating certain requested
clarifications and minor revisions.
I. Predecessor of Distributing Definition
The Treasury Department and the IRS are promulgating the final
regulations with the same goal as the 2004 Proposed Regulations and the
2016 Regulations: To ensure that section 355(e) applies properly to
synthetic spin-offs of a Divided Corporation's assets. As noted in part
II of the Background, Congress has determined that corporate-level gain
should be recognized by a Distributing ``[i]n cases in which it is
intended that new shareholders will acquire ownership of a business in
connection with a [Distribution],'' because the overall transaction
``more closely resembles a corporate level disposition of the portion
of the business that is acquired.'' Senate Report at 139-140.
Consistent with this policy, the final regulations provide that a
corporation cannot qualify as a POD unless the
[[Page 69311]]
corporation's assets are divided through a Distribution (that is,
unless the corporation is a Divided Corporation).
The Treasury Department and the IRS have determined that, by
limiting POD treatment to Divided Corporations, the final regulations
will further the policy of section 355(e) while continuing to permit
tax-free divisions of existing business arrangements among existing
shareholders. See Senate Report at 139. In particular, the Treasury
Department and the IRS have sought to avoid definitions that would
cause section 355(e) to apply to transactions that do not resemble
sales. For example, starting with the 2004 Proposed Regulations, the
Treasury Department and the IRS have rejected a POD definition that
would include any corporation that, without more, transfers assets to a
Distributing in a Section 381 Transaction.
The following example illustrates how that rejected POD definition
would have run contrary to the policies of section 355 and section
355(e). As part of a Plan, P merges tax-free into Distributing in a
reorganization described in section 368(a)(1)(A), with the P
shareholders receiving 40 percent of the stock of Distributing.
Distributing then distributes all of the stock of Controlled (which
holds none of the P assets) in a Distribution. If P were treated as a
POD, the Distribution would result in gain recognition under section
355(e), because it occurred as part of the same Plan as an acquisition
of a 50-percent or greater interest in P (that is, a Planned 50-percent
Acquisition). See section 355(e)(3)(B). However, the Treasury
Department and the IRS have determined that the policy of section
355(e) does not warrant the recognition of gain in this case, because
the assets of P have not been divided and neither Distributing nor
Controlled has undergone a Planned 50-percent Acquisition. Rather, the
Distribution effected a division of existing business arrangements
among existing shareholders, and Congress intended section 355 to
afford tax-free treatment to such a transaction. See Senate Report at
139.
II. Scope of the Potential Predecessor Definition
Commenters criticized the breadth of the POD definition in the 2016
Regulations. Although commenters generally supported the treatment of P
as a POD in the 2016 Preamble Example, commenters questioned the policy
of treating P as a POD in Example 5. See part III.B of the Background
section (describing the 2016 Preamble Example and Example 5). After
considering all comments received on this issue, and as discussed
further in the remainder of this part II, the Treasury Department and
the IRS have determined that the series of transactions set forth in
Example 5 should not be viewed as a synthetic spin-off, and that P
therefore should not be treated as a POD in Example 5.
A. Example 5 Reduces Neither the Total Value nor the Total Built-In
Gain Inside P
When a corporation distributes an appreciated asset with respect to
its stock, the corporation disposes of the asset for no consideration,
reducing both the total value and the total built-in gain inside the
corporation. In this regard, the synthetic spin-off by P in the Base
Case Example resembles an actual Distribution by P of stock of a
controlled corporation holding the P assets actually held by
Controlled. Both transactions reduce the total value and built-in gain
of P (which, in the Base Case Example, becomes part of Distributing) by
the value of, and built-in gain in, the P assets held by Controlled.
By contrast, Example 5 involves a section 351 exchange by P, which
reduces neither the total value nor the total built-in gain inside P.
In the section 351 exchange, P exchanges assets for Distributing stock
of equal value. Under section 358, P's basis in this Distributing stock
is determined by reference to P's basis in the assets exchanged
therefor, and is then allocated between P's Distributing stock and the
Controlled stock P receives in the Distribution. Therefore, upon the
conclusion of Example 5, P holds Distributing stock and Controlled
stock with an aggregate value and built-in gain equal to the aggregate
value of, and built-in gain in, the assets P transferred to
Distributing. Rather than disposing of an asset for no consideration
(as is the case in an actual distribution of property with respect to a
Distributing's stock), P merely has exchanged one asset for another in
Example 5. As a result, the Treasury Department and the IRS have
determined that the series of transactions set forth in Example 5 does
not resemble an actual Distribution by P and should not be viewed as a
synthetic spin-off.
B. Ease of Elimination of Built-In Gain in the 2016 Preamble Example
The key distinction between the 2016 Preamble Example and Example 5
is the relative ease with which a subsequent restructuring could be
undertaken to eliminate P's substituted built-in gain in the 2016
Preamble Example. The 2016 Preamble Example, like Example 5, involves a
section 351 exchange in which P exchanges assets for Internal
Distributing stock with the same value and built-in gain. Unlike in
Example 5, however, Distributing in the 2016 Preamble Example directly
and indirectly owns 100 percent of the stock of both P and Internal
Distributing. As a result, in the 2016 Preamble Example, Distributing
could unilaterally eliminate the built-in gain preserved in P's
Internal Distributing stock through an internal restructuring. The
occurrence of such an internal restructuring would make the 2016
Preamble Example difficult to distinguish from the Base Case Example.
By contrast, upon the conclusion of Example 5, P owns only 10
percent of the stock of each of Distributing and Controlled, whereas
corporation Y owns 90 percent. Although it may be theoretically
possible for P to eliminate its built-in gain in this stock through
certain transactions involving Distributing and Controlled, P lacks any
meaningful control over either corporation. In addition, the Treasury
Department and the IRS note that such built-in gain elimination
transactions generally would carry significant non-tax consequences.
Therefore, it would be unreasonable to assume that such transactions
would occur and that P's built-in gain in the Distributing and
Controlled stock would be eliminated after the Distribution.
One commenter asserted that there is little opportunity for P to
engage in a subsequent restructuring to eliminate its built-in gain in
Distributing or Controlled stock in a case like Example 5 or the 2016
Preamble Example unless P is a member of Distributing's affiliated
group (as defined in section 1504 without regard to section 1504(b))
(Expanded Affiliated Group). The Treasury Department and the IRS agree
with this comment.
Based on the foregoing, the final regulations define the term
Potential Predecessor as any corporation other than Distributing or
Controlled, but only if either (i) as part of a Plan, the corporation
transfers property to a Potential Predecessor, Distributing, or a
member of the same Expanded Affiliated Group as Distributing in a
Section 381 Transaction (as in the Base Case Example), or (ii)
immediately after completion of the Plan, the corporation is a member
of the same Expanded Affiliated Group as Distributing (as in the 2016
Preamble Example). Accordingly, under the final regulations, P in
Example 5 is not a Potential Predecessor (and thus cannot be a POD).
[[Page 69312]]
III. Pre-Distribution and Post-Distribution Requirements
A. Overview
Under the 2016 Regulations, a Potential Predecessor qualified as a
POD only if two pre-Distribution requirements and one post-Distribution
requirement were satisfied. The Treasury Department and the IRS
intended that these requirements, taken together, (i) composed a
technical description of a synthetic spin-off, and (ii) limited POD
treatment to Potential Predecessors the assets of which are divided
tax-free through a Distribution by Distributing. The following
discussion summarizes these requirements.
1. First Pre-Distribution Requirement: Relevant Property
To satisfy the first pre-Distribution requirement, any Controlled
stock distributed in the Distribution must have been (i) Relevant
Property, the gain on which was not recognized in full as part of a
Plan, or (ii) acquired by Distributing for Relevant Property, the gain
on which was not recognized in full as part of a Plan, and that was
held by Controlled immediately before the Distribution (Relevant
Property Requirement). The term ``Relevant Property'' generally
referred to any property held by the Potential Predecessor at any point
during the Plan Period (that is, the period that ends immediately after
the Distribution and begins on the earliest date on which any part of
the Plan is agreed to or understood, arranged, or substantially
negotiated). See Sec. 1.355-8T(b)(2)(iv).
2. Second Pre-Distribution Requirement: Controlled Stock Reflects Basis
of Separated Property
To satisfy the second pre-Distribution requirement, any Controlled
stock distributed in the Distribution must have reflected the basis of
any Separated Property (Reflection of Basis Requirement). In general,
the 2016 Regulations defined the term ``Separated Property'' as any
Relevant Property relied on to satisfy the Relevant Property
Requirement. See Sec. 1.355-8T(b)(2)(vii). The 2016 Regulations did
not define the phrase reflect the basis.
3. Post-Distribution Requirement: Division of Relevant Property
To satisfy the post-Distribution requirement, immediately following
the Distribution, ownership of Relevant Property must have been divided
between Controlled, on the one hand, and Distributing or the Potential
Predecessor, on the other hand (Division of Relevant Property
Requirement).
B. Relevant Property Requirement: Fluctuations in Value
One commenter requested clarification of the Relevant Property
Requirement's application to a case in which (i) gain on Relevant
Property is fully recognized at some point during the Plan Period, but
(ii) the Relevant Property subsequently appreciates so that built-in
gain exists at the time of the Distribution. The Treasury Department
and the IRS did not intend for fluctuations in value to affect the
determination of POD status under the 2016 Regulations. Consequently,
the final regulations replace the requirement that gain on Relevant
Property not be recognized in full ``as part of a Plan'' with the
requirement that gain (if any) on Relevant Property not be recognized
in full ``at any point during the Plan Period.''
C. Reflection of Basis Requirement
The Treasury Department and the IRS have received numerous comments
requesting clarification of the Reflection of Basis Requirement's scope
and purpose. These comments arose from the failure of the 2016
Regulations to define the phrase reflect the basis.
To highlight the potential overbreadth of this undefined phrase,
one commenter questioned whether P could qualify as a POD solely
through a basis adjustment under Sec. 1.1502-32. In the commenter's
example, P and unrelated Distributing (which is the common parent of a
consolidated group) form corporation X in a section 351 exchange in
which P contributes Asset 1 and Distributing contributes other assets
in exchange for X stock, with Distributing receiving at least 80
percent of X's stock by vote and value. Thereafter, Distributing
contributes its X stock to Controlled in exchange for Controlled stock.
Then, because of items relating to Asset 1, Distributing's basis in its
Controlled stock is adjusted under Sec. 1.1502-32. Finally,
Distributing distributes all of the stock of Controlled. Based on this
illustrative example, the commenter expressed concern that the Sec.
1.1502-32 basis adjustment could cause Distributing's Controlled stock
to reflect the basis of Asset 1, and the commenter asserted that
treating P as a POD in this case would be inappropriate.
The Treasury Department and the IRS did not intend the Reflection
of Basis Requirement in the 2016 Regulations to be satisfied solely by
a basis adjustment under Sec. 1.1502-32. The Reflection of Basis
Requirement served two related purposes. First, the Treasury Department
and the IRS intended the Reflection of Basis Requirement to ensure a
connection between the gain in the POD's property held by Controlled
and the gain that Distributing must recognize under section 355(e).
Second, the Treasury Department and the IRS intended this requirement
to avoid improper duplication of gain if Controlled stock is
distributed in multiple Distributions as part of the same Plan. See
Sec. 1.355-8T(h), Example 7 (concluding with respect to consecutive
Distributions that, although P is a POD with respect to the first
Distribution, P is not a POD with respect to the second Distribution
because the C stock distributed in the second Distribution did not
reflect the basis of any Separated Property).
The Treasury Department and the IRS have addressed these concerns
in the final regulations by clearly articulating the Reflection of
Basis Requirement. The final regulations clarify that the Reflection of
Basis Requirement is satisfied only if any Controlled stock that
satisfies the Relevant Property Requirement had a basis prior to the
Distribution that was determined, in whole or in part, by reference to
the basis of Separated Property. The final regulations make the same
clarification to the two other provisions that, under the 2016
Regulations, referred to a reflection of basis: Sec. 1.355-
8T(b)(2)(vi)(B)(2) (regarding the treatment of Controlled stock as a
Substitute Asset); and Sec. 1.355-8T(b)(2)(x) (providing a deemed
exchange rule for purposes of the Relevant Property Requirement, the
Reflection of Basis Requirement, and the Substitute Asset definition).
In addition, the final regulations clarify that the Reflection of
Basis Requirement is satisfied only if, during the Plan Period prior to
the Distribution, any Controlled stock that satisfies the Relevant
Property Requirement (and the first prong of the Reflection of Basis
Requirement) was neither distributed in a section 355(e) distribution
nor transferred in a transaction in which the gain (if any) on that
Controlled stock was recognized in full. This clarification ensures
that the final regulations cannot be interpreted in a manner that would
give rise to improper duplication of gain, a policy objective of the
Treasury Department and the IRS in issuing the 2016 Regulations.
D. Treatment of Property Acquired Not Pursuant to a Plan
One commenter requested that the Treasury Department and the IRS
clarify that property acquired by a Potential
[[Page 69313]]
Predecessor during the Plan Period would not be treated as Relevant
Property if not acquired pursuant to a Plan. In particular, the
commenter presented an example in which a Potential Predecessor becomes
a member of Distributing's consolidated group pursuant to a Plan. Prior
to a Distribution, the Potential Predecessor acquires from other
members of Distributing's consolidated group property that had not been
transferred directly or indirectly to Distributing pursuant to the
Plan. The commenter requested clarification that this property is not
Relevant Property.
The commenter's specific concern was already addressed by an
exception to the Relevant Property definition in the 2016 Regulations
(see Sec. 1.355-8T(b)(2)(iv)(B)), and the final regulations retain
this exception. This exception provides that property held directly or
indirectly by Distributing is Relevant Property of a Potential
Predecessor only to the extent that the property (1) was transferred
directly or indirectly to Distributing during the Plan Period, and (2)
was Relevant Property of the Potential Predecessor before the direct or
indirect transfers. This exception exempts the property in the
commenter's example from treatment as Relevant Property because the
property was not transferred directly or indirectly to Distributing
during the Plan Period.
In addition, the final regulations include a Plan limitation in the
Division of Relevant Property Requirement. Thus, the Division of
Relevant Property Requirement will be satisfied only if ownership of a
Potential Predecessor's Relevant Property has been divided as part of a
Plan. Both the preamble to the 2016 Regulations and the text of Sec.
1.355-8T(a)(3) (summarizing the POD definition) described the Division
of Relevant Property Requirement in the 2016 Regulations as including a
Plan limitation, and the Treasury Department and the IRS had intended
for Sec. 1.355-8T(b)(1)(iii) (the Division of Relevant Property
Requirement) to include this limitation. The Treasury Department and
the IRS intend that the Plan limitation in the Division of Relevant
Property Requirement will ensure more generally that Relevant Property
acquired by a Potential Predecessor during the Plan Period, but not
pursuant to a Plan, will not result in an inappropriate application of
section 355(e).
E. Stock of Distributing as Relevant Property
One commenter questioned whether a reference in Sec. 1.355-
8T(b)(2)(v) (limiting the circumstances under which Distributing stock
is treated as Relevant Property) to Sec. 1.355-8T(b)(1)(ii) (the
Relevant Property Requirement and the Reflection of Basis Requirement)
was intended to refer instead to Sec. 1.355-8T(b)(1)(iii) (the
Division of Relevant Property Requirement). The Treasury Department and
the IRS intended for Sec. 1.355-8T(b)(2)(v) to reference the Division
of Relevant Property Requirement and have incorporated this revision
into the final regulations.
IV. Implicit Permission
Although Sec. 1.355-7 generally governs the determination of
whether a Distribution and an acquisition of a 50-percent or greater
interest in a POD have occurred as part of the same Plan, the 2016
Regulations contained special rules in this regard. See Sec. 1.355-
8T(a)(4)(ii). In general, references to Distributing in Sec. 1.355-7
included references to a POD. However, any agreement, understanding,
arrangement, or substantial negotiations regarding the acquisition of
the stock of a POD were analyzed under Sec. 1.355-7 with respect to
the actions of officers or directors of Distributing or Controlled,
controlling shareholders of Distributing or Controlled, or a person
acting with permission of one of those persons. For that purpose,
references in Sec. 1.355-7 to Distributing did not include references
to a POD. Therefore, the actions of officers, directors, or controlling
shareholders of a POD, or of a person acting with the implicit or
explicit permission of one of those persons, would not have been
considered for this purpose unless those persons otherwise would have
been treated as acting on behalf of Distributing or Controlled under
Sec. 1.355-7. The final regulations retain these rules.
One commenter expressed concern regarding the potential scope of
the ``implicit permission'' concept in Sec. 1.355-7 given that the
2016 Regulations contemplated that actions on behalf of a Potential
Predecessor may be taken into account if such actions were carried out
with the implicit permission of Distributing. The Treasury Department
and the IRS have not addressed this comment in the final regulations
because the implicit permission concept is a component of Sec. 1.355-7
and therefore is beyond the scope of this Treasury decision.
V. Successors
Under section 355(e)(4)(D), any reference to Controlled or
Distributing includes a reference to any successor of such corporation
(Successor). Like the 2004 Proposed Regulations, the 2016 Regulations
limited the definition of the term Successor to a corporation to which
Distributing or Controlled (as the case may be) transfers property in a
Section 381 Transaction after the Distribution. A partnership cannot
receive assets in a Section 381 Transaction. Accordingly, a partnership
could not have been a Successor under either the 2004 Proposed
Regulations or the 2016 Regulations. As noted later in this part V, the
final regulations retain this approach.
The 2004 Proposed Regulations and the 2016 Regulations also
contained a deemed acquisition rule (see Sec. 1.355-8T(d)(2)). Under
this rule, after a Section 381 Transaction, an acquisition of stock of
the acquiring corporation is treated also as an acquisition of the
stock of the distributor or transferor corporation in the Section 381
Transaction. Thus, if the assets of Distributing or any POD are
acquired by another corporation in a Section 381 Transaction, then any
subsequent acquisition of the stock of the acquiring corporation is
treated also as an acquisition of the stock of Distributing or the POD,
as the case may be.
As a result of these rules, a corporation's status as a Successor
of Distributing or Controlled matters only insofar as an acquisition of
its stock is treated as an acquisition of the stock of Distributing or
Controlled, respectively, which could result in a Planned 50-percent
Acquisition of Distributing or Controlled. Therefore, the only
significance of a Planned 50-percent Acquisition of a Successor is its
treatment as a deemed Planned 50-percent Acquisition of Distributing or
Controlled (as the case may be). Accordingly, if any of the stock of
Distributing or Controlled has been acquired in, or prior to, a Section
381 Transaction, the application of section 355(e) will turn on whether
a Planned 50-percent Acquisition of Distributing or Controlled has
occurred, taking into account acquisitions of the stock of Distributing
or Controlled in, and prior to, the Section 381 Transaction, as well as
any acquisitions of the stock of the Successor following the Section
381 Transaction.
Commenters supported this approach, and the Treasury Department and
the IRS have retained it in the final regulations. Thus, under the
final regulations, a Successor of Distributing or of Controlled must be
a corporation to which Distributing or Controlled, respectively,
transfers property in a Section 381 Transaction after the Distribution.
A partnership cannot be a Successor of Distributing or Controlled under
the final regulations for purposes of section 355(e). Certain
references in
[[Page 69314]]
the 2016 Regulations to a Planned 50-percent Acquisition of a Successor
have been refined to clarify the significance of Successor status.
VI. Gain Limitation Rules
Taken together, sections 355(e), 355(c), and 361(c) generally
require Distributing to recognize any gain in Controlled stock and
securities distributed in a Distribution that is part of the same Plan
as a Planned 50-percent Acquisition of a POD, Distributing, or
Controlled (the amount of such gain, Statutory Recognition Amount).
However, the 2016 Regulations contained special rules that limited the
amount of gain that section 355(e) causes Distributing to recognize in
certain cases involving a POD. In cases involving a Planned 50-percent
Acquisition of a POD, Sec. 1.355-8T(e)(2) (POD Gain Limitation Rule)
generally limited the amount of gain Distributing was required to
recognize to any built-in gain in the POD's Separated Property
(generally, POD assets held by Controlled). Similarly, in cases
involving a Planned 50-percent Acquisition of Distributing as the
result of a transfer by a POD to Distributing in a Section 381
Transaction, Sec. 1.355-8T(e)(3) (Distributing Gain Limitation Rule)
generally reduced the amount of gain Distributing was required to
recognize by the built-in gain in the POD's Separated Property. In
addition, in cases involving multiple Planned 50-percent Acquisitions,
Sec. 1.355-8T(e)(1) generally provided that the total gain limitation
applicable under Sec. 1.355-8T(e) is determined by adding the
Statutory Recognition Amount (subject to the POD Gain Limitation Rule
and the Distributing Gain Limitation Rule) with respect to each Planned
50-percent Acquisition. Finally, Sec. 1.355-8T(e)(4) provided that the
amount required to be recognized by Distributing under section 355(e)
with regard to a single Distribution will not exceed the Statutory
Recognition Amount.
Commenters questioned why the 2016 Regulations limited the
Distributing Gain Limitation Rule to Section 381 Transactions, and
recommended expanding the Distributing Gain Limitation Rule so that it
applies to any Planned 50-Percent Acquisition of Distributing. In
particular, one commenter asserted that the form of the transaction in
which a Planned 50-percent Acquisition of Distributing occurs should
not be relevant to the application of the gain limitation rules.
As discussed in the preamble to the 2016 Regulations, the Treasury
Department and the IRS intended the Distributing Gain Limitation Rule
to minimize the Federal income tax impact of directionality between
economically equivalent Section 381 Transactions. In other words, the
Distributing Gain Limitation Rule was intended to ensure that the
amount of gain required to be recognized under section 355(e) would be
the same regardless of whether the smaller or the larger corporation in
a Section 381 Transaction acts as the acquiring corporation. The
Distributing Gain Limitation Rule was limited to Section 381
Transactions in the 2016 Regulations because the direction of other
types of transactions (such as section 351 exchanges) generally cannot
be reversed without changing the substance of the transaction, and thus
generally do not implicate the policy of directional neutrality.
However, upon further study, the Treasury Department and the IRS have
determined that the policy underlying the Distributing Gain Limitation
Rule should not be limited to directional neutrality.
The POD definition is based on the theory that a Distribution that
effects a tax-free division of the assets of a corporation other than
Distributing (a POD) may be viewed as two separate Distributions: One
by the POD (of a Controlled holding the Separated Property) (POD
Distribution), and one by Distributing (of a Controlled holding all of
the property held by Controlled in the actual Distribution other than
the Separated Property) (Non-POD Distribution). Section 355(e) requires
gain recognition when new shareholders acquire ownership of a business
in connection with a spin-off. Thus, when a Planned 50-percent
Acquisition of a POD occurs in connection with a POD Distribution, the
final regulations require gain recognition under section 355(e).
However, unless there is also a Planned 50-percent Acquisition of
Distributing, the Non-POD Distribution represents a division of
existing business arrangements among existing shareholders, to which
Congress intended to afford tax-free treatment. See Senate Report at
139-140. Accordingly, the POD Gain Limitation Rule limits the amount of
gain required to be recognized to the built-in gain on the Separated
Property.
The same policy goals justify the expansion of the Distributing
Gain Limitation Rule so that it applies to any Planned 50-percent
Acquisition of Distributing--however and by whomever effected. If a
Distribution involves a POD and occurs in connection with a Planned 50-
percent Acquisition of Distributing (but no Planned 50-percent
Acquisition of the POD or Controlled), then the POD Distribution should
not be subject to gain recognition because it represents a division of
existing business arrangements among existing shareholders.
Accordingly, the Distributing Gain Limitation Rule in the final
regulations applies if there is a Planned 50-percent Acquisition of
Distributing. However, consistent with the policy underlying the
Distributing Gain Limitation Rule, a Distribution will benefit from the
Distributing Gain Limitation Rule only if a POD exists and does not
also undergo a Planned 50-percent Acquisition. If no POD exists, then
the limitation under the Distributing Gain Limitation Rule will equal
the Statutory Recognition Amount, because there is no Separated
Property. If a POD exists but also undergoes a Planned 50-percent
Acquisition, then Distributing must recognize the Statutory Recognition
Amount with respect to the Planned 50-percent Acquisition of the POD
(subject to the POD Gain Limitation Rule) and the Planned 50-percent
Acquisition of Distributing (subject to the Distributing Gain
Limitation Rule). See Sec. 1.355-8(e)(1)(ii) of the final regulations
(Multiple Planned 50-percent Acquisitions). Similarly, if there are
Planned 50-percent Acquisitions of both Distributing and Controlled,
Distributing must recognize the Statutory Recognition Amount with
respect to the Planned 50-percent Acquisition of Controlled (which is
not eligible for limitation under any gain limitation rule) and the
Planned 50-percent Acquisition of Distributing (subject to the
Distributing Gain Limitation Rule). Although the multiple Planned 50-
percent Acquisition rule just described may deny any benefit under the
gain limitation rules, in no event will the final regulations require
Distributing to recognize an amount that exceeds the Statutory
Recognition Amount with regard to a single Distribution. See Sec.
1.355-8(e)(4) of the final regulations (gain recognition limited to
Statutory Recognition Amount).
The Treasury Department and the IRS have clarified the gain
limitation rules in the final regulations to make them easier to
understand and apply. The Treasury Department and the IRS also have
refined the calculation of the gain limitation under the Distributing
Gain Limitation Rule to account for the possibility of more than one
POD with respect to a single Distribution. In addition, to clarify that
both built-in gain and built-in loss assets are taken into account in
computing any applicable gain limitation, the Treasury Department and
the IRS have refined the description of gain in the Relevant
[[Page 69315]]
Property Requirement by adding the parenthetical phrase ``(if any),''
and have added a similar clarification to the Separated Property
definition.
VII. Relevant Equity
The 2016 Temporary Regulations used the defined term ``Relevant
Stock'' (stock that is Relevant Property) in connection with the
defined terms ``Separated Property'' and ``Underlying Property''
(property directly or indirectly held by a corporation that is the
issuer of Relevant Stock). See Sec. 1.355-8T(b)(2)(iv), (vii), and
(viii). These terms were used to ensure that gain would not be
duplicated in determining the applicable gain limitation amount (if
any) if the Relevant Property held by Controlled included stock in a
corporation. The potential for duplication existed because the gain
limitation is calculated based on the built-in gain in Relevant
Property held by Controlled, and the definition of ``Relevant
Property'' included assets held directly or indirectly (and thus
included both stock of a corporation and any assets held by the
corporation).
The Treasury Department and the IRS have determined that a similar
risk of duplicated gain exists when Relevant Property includes an
interest in a partnership. Accordingly, the final regulations replace
the term ``Relevant Stock'' with the term ``Relevant Equity,'' which
means Relevant Property that is an equity interest in a corporation or
a partnership. This clarification relates only to the determination of
the limitation on gain under Sec. 1.355-8(e) of the final regulations
(if any).
VIII. Section 336(e)
The 2016 Regulations prohibited a section 336(e) election if the
amount of gain required to be recognized by Distributing with respect
to the Distribution was less than the Statutory Recognition Amount due
to the POD Gain Limitation Rule or the Distributing Gain Limitation
Rule. This prohibition applied even if Distributing chose to recognize
the Statutory Recognition Amount under Sec. 1.355-8T(e)(4). One
commenter criticized this prohibition as ``inequitable as a policy
matter and unnecessary as an administrative one.''
Although the final regulations retain this prohibition, the
Treasury Department and the IRS continue to study and request comments
on the following issues: (1) Whether permitting a section 336(e)
election in this context would be consistent with the policy of section
336(e), (2) whether permitting a section 336(e) election in this
context could give rise to inappropriate planning opportunities, (3)
whether permitting a section 336(e) election in this context only if
the Separated Property accounts for a certain minimum percentage of
Controlled's value or built-in gain would be appropriate, and (4)
whether limiting the deemed asset disposition that results from a
section 336(e) election in this context to a deemed disposition of the
Separated Property would be appropriate.
IX. Stock Deemed Acquired in a Section 381 Transaction
Section 355(e)(3)(B) provides a special rule for certain asset
acquisitions. For purposes of section 355(e), if the assets of
Distributing or Controlled are acquired by a successor corporation in a
transaction described in section 368(a)(1)(A), (C), or (D), or in any
other transaction specified in regulations, the shareholders
(immediately before the acquisition) of the successor corporation are
treated as acquiring stock in Distributing or Controlled, respectively,
except as otherwise provided in regulations. Similarly, the 2016
Regulations provided that any Section 381 Transaction is treated as an
acquisition of stock in the distributor or transferor corporation by
shareholders of the acquiring corporation. A commenter pointed out a
mathematical error in the textual example that followed this rule (in
Sec. 1.355-8T(d)(1)). The final regulations correct this error and
make minor clarifications to improve the readability of the operative
rule.
X. No Step Transaction Implications From Examples
One commenter suggested that the Treasury Department and the IRS
clarify that no inference should be drawn from the examples in Sec.
1.355-8T(h) as to the intended application of the step transaction
doctrine and other general Federal income tax principles. The Treasury
Department and the IRS did not intend for any such inference to be
drawn, and have added a specific disclaimer to this effect in the final
regulations.
XI. Transition Rule
The 2016 Regulations generally applied to Distributions occurring
after January 18, 2017. However, under a transition rule, the 2016
Regulations generally did not apply to a Distribution that was (A) made
pursuant to a binding agreement in effect on or before December 16,
2016 and at all times thereafter; (B) described in a ruling request
submitted to the IRS on or before December 16, 2016; or (C) described
on or before December 16, 2016 in a public announcement or in a filing
with the Securities and Exchange Commission. For the transition rule to
apply, the agreement, ruling request, public announcement, or filing
described in the preceding sentence had to describe all steps relevant
to the determination of POD status. See Sec. 1.355-8T(i)(2)(ii).
One commenter criticized the ``all relevant steps'' rule in Sec.
1.355-8T(i)(2)(ii) as ``extremely narrow'' and inappropriate for
immediately effective regulations. This commenter contended that it is
``unlikely that all such transactions would be described . . . until
very late in the long and expensive process of a corporate separation,
if at all.''
The Treasury Department and the IRS note that the 2016 Regulations
were not immediately applicable; they were published on December 19,
2016, but they generally applied only to Distributions that occurred
after January 18, 2017. Moreover, the final regulations do not contain
a transition rule, so the commenter's concern is relevant only to
transactions that were the subject of an agreement, ruling request,
public announcement, or public filing that occurred in 2016 (or
before). Finally, despite the commenter's general concern, the Treasury
Department and the IRS are unaware of any transactions that failed to
qualify for the transition rule due to the ``all relevant steps'' rule
in Sec. 1.355-8T(i)(2)(ii). Accordingly, the Treasury Department and
the IRS have determined that it is not necessary to reconsider the
transition rule in the 2016 Regulations as part of this Treasury
decision.
XII. Additional Clarifications
Commenters noted generally that certain aspects of the 2016
Regulations were complicated and difficult to understand. The Treasury
Department and the IRS have refined and clarified certain aspects of
the 2016 Regulations in the final regulations to make the rules easier
to follow and understand. For instance, certain paragraphs in the 2016
Regulations that were long and contained multiple distinct rules have
been subdivided in the final regulations. In addition, defined terms
have been added for certain rules (such as the Relevant Property
Requirement, the Reflection of Basis Requirement, and the Division of
Relevant Property Requirement). These defined terms are intended to
allow the reader to more intuitively grasp the meaning of the numerous
provisions cross-referenced in the final regulations.
[[Page 69316]]
Section 1.355-8T(c)(1) defined the term ``Predecessor of
Controlled'' and provided certain rules relating to Predecessors of
Controlled. One of these rules provided that, for purposes of Sec.
1.355-8T(c)(1), a reference to Controlled included a reference to a
Predecessor of Controlled. However, another provision in the 2016
Regulations (Sec. 1.355-8T(a)(4)(i)) provided more generally that,
except as otherwise provided, any reference to Controlled included, as
the context may have required, a reference to any Predecessor of
Controlled. Accordingly, the rule in Sec. 1.355-8T(c)(1) was
unnecessary, and the Treasury Department and the IRS have omitted it in
the final regulations.
XIII. Examples
The Treasury Department and the IRS have modified three of the
examples contained in the 2016 Regulations (Examples 5, 7, and 8), and
omitted one example (Example 6), for the reasons described in this part
XIII. All of the retained examples have been updated to reflect
modifications in the final regulations. For instance, the POD analyses
in Examples 3 and 4 eliminate the statement that Controlled stock is
Separated Property, because that fact is no longer relevant under the
revised Reflection of Basis Requirement. In some of the examples, the
analysis has been clarified to make it easier to follow and understand.
The facts of Example 5 of the 2016 Regulations have been retained,
but the consequences of the example have changed due to the
modification the Treasury Department and the IRS have made to the
Potential Predecessor definition. As a result of this modification, P
in Example 5 is no longer a Potential Predecessor (and thus is not a
POD for that reason).
Example 6 of the 2016 Regulations has been omitted. This example
illustrated a variation on Example 5 that used a forward triangular
merger instead of a section 351 exchange. However, due to the
modification to the Potential Predecessor definition, P in Example 6 is
no longer a Potential Predecessor (and thus is not a POD for that
reason), which eliminates the utility of this example.
Example 7 of the 2016 Regulations has been incorporated into new
Example 6 in the final regulations, which is based on the 2016 Preamble
Example.
Example 8 of the 2016 Regulations has been retained as Example 7 in
the final regulations, but has been modified so that P1 and P2 are
Potential Predecessors under the final regulations. In particular, the
section 351 exchange between P2 and D has been replaced by a Section
381 Transaction in which P2 merges into D.
Applicability Date
Section 7805(b)(1)(A) and (B) of the Code generally provide that no
temporary, proposed, or final regulation relating to the internal
revenue laws may apply to any taxable period ending before the earliest
of (A) the date on which such regulation is filed with the Federal
Register, or (B) in the case of a final regulation, the date on which a
proposed or temporary regulation to which the final regulation relates
was filed with the Federal Register. In addition, section 7805(e)
provides that any temporary regulation shall also be issued as a
proposed regulation, and that such temporary regulation shall expire
within 3 years after the date of issuance of the temporary regulation.
The final regulations, the substance of which is generally the same
as that of the 2016 Regulations, apply to Distributions that occur
after December 15, 2019, the day before the expiration date of the 2016
Temporary Regulations.
Special Analyses
This regulation is not subject to review under section 6(b) of
Executive Order 12866 pursuant to the Memorandum of Agreement (April
11, 2018) between the Department of the Treasury and the Office of
Management and Budget regarding review of tax regulations.
Pursuant to the Regulatory Flexibility Act (5 U.S.C. chapter 6), it
is hereby certified that these final regulations will not have a
significant economic impact on a substantial number of small entities.
This certification is based on the fact that these regulations would
primarily affect large corporations with a substantial number of
shareholders, as well as corporations that are members of large
corporate groups. Additionally, the Treasury Department and the IRS
have determined that no additional burden will be associated with these
final regulations. Therefore, a regulatory flexibility analysis is not
required.
Pursuant to section 7805(f) of the Internal Revenue Code, the 2016
Proposed Regulations were submitted to the Chief Counsel for Advocacy
of the Small Business Administration for comment on their impact on
small businesses, and no comments were received.
Drafting Information
The principal author of these regulations is W. Reid Thompson of
the Office of Associate Chief Counsel (Corporate). 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.
Amendments to the Regulations
Accordingly, 26 CFR part 1 is amended as follows:
PART 1--INCOME TAXES
0
Paragraph 1. The authority citation for part 1 is amended by removing
the entry for Sec. 1.355-8T and adding an entry in numerical order for
Sec. 1.355-8 to read in part as follows:
Authority: 26 U.S.C. 7805 * * *
Section 1.355-8 also issued under 26 U.S.C. 336(e),
355(e)(3)(B), 355(e)(5), and 355(f).
* * * * *
0
Par. 2. Section 1.355-0 is amended by revising the introductory text,
removing the entries for Sec. 1.355-8T, and adding the entries for
Sec. 1.355-8 to read as follows:
Sec. 1.355-0 Outline of sections.
In order to facilitate the use of Sec. Sec. 1.355-1 through 1.355-
8, this section lists the major paragraphs in those sections as
follows:
* * * * *
Sec. 1.355-8 Definition of predecessor and successor and
limitations on gain recognition under section 355(e) and section
355(f).
(a) In general.
(1) Scope.
(2) Overview.
(i) Purposes and conceptual overview.
(ii) References to and definitions of terms used in this
section.
(iii) Special rules and examples.
(3) Purposes of section; Predecessor of Distributing overview.
(i) Purposes.
(ii) Predecessor of Distributing overview.
(A) Relevant Property transferred to Controlled.
(B) Relevant Property includes Controlled Stock.
(4) References.
(i) References to Distributing or Controlled.
(ii) References to Plan or Distribution.
(iii) Plan Period.
(5) List of definitions.
(b) Predecessor of Distributing.
(1) Definition.
(i) In general.
(ii) Pre-Distribution requirements.
(A) Relevant Property requirement.
(B) Reflection of basis requirement.
(iii) Post-Distribution requirement.
(2) Additional definitions and rules related to paragraph (b)(1)
of this section.
(i) References to Distributing and Controlled.
(ii) Potential Predecessor.
(A) Potential Predecessor definition.
[[Page 69317]]
(B) Expanded Affiliated Group definition.
(iii) Successors of Potential Predecessors.
(iv) Relevant Property; Relevant Equity.
(A) In general.
(B) Property held by Distributing.
(C) F reorganizations.
(v) Stock of Distributing as Relevant Property.
(A) In general.
(B) Certain reorganizations.
(vi) Substitute Asset.
(A) In general.
(B) Controlled stock received by Distributing.
(1) In general.
(2) Exception.
(C) Treatment as Relevant Property.
(vii) Separated Property.
(viii) Underlying Property.
(ix) Multiple Predecessors of Distributing.
(x) Deemed exchanges.
(c) Additional definitions.
(1) Predecessor of Controlled.
(2) Successors.
(i) In general.
(ii) Determination of Successor status.
(3) Section 381 Transaction.
(d) Special acquisition rules.
(1) Deemed acquisitions of stock in Section 381 Transactions.
(i) Rule.
(ii) Example.
(2) Deemed acquisitions of stock after Section 381 Transactions.
(3) Separate counting for Distributing and each Predecessor of
Distributing.
(e) Special rules for limiting gain recognition.
(1) Overview.
(i) Gain limitation.
(ii) Multiple Planned 50-percent Acquisitions.
(iii) Statutory Recognition Amount limit; Section 336(e).
(2) Planned 50-percent Acquisition of a Predecessor of
Distributing.
(i) In general.
(ii) Operating rules.
(A) Separated Property other than Controlled stock.
(B) Controlled stock that is Separated Property.
(C) Anti-duplication rule.
(3) Planned 50-percent Acquisition of Distributing.
(4) Gain recognition limited to Statutory Recognition Amount.
(5) Section 336(e) election.
(f) Predecessor or Successor as a member of the affiliated
group.
(g) Inapplicability of section 355(f) to certain intra-group
Distributions.
(1) In general.
(2) Alternative application of section 355(f).
(h) Examples.
(i) Applicability date.
Sec. 1.355-8T [Removed]
0
Par. 3. Section 1.355-8T is removed.
0
Par. 4. Section 1.355-8 is added to read as follows:
Sec. 1.355-8 Definition of predecessor and successor and limitations
on gain recognition under section 355(e) and section 355(f).
(a) In general--(1) Scope. For purposes of section 355(e), this
section provides rules under section 355(e)(4)(D) to determine whether
a corporation is treated as a predecessor or successor of a
distributing corporation (Distributing) or a controlled corporation
(Controlled) with respect to a distribution by Distributing of stock
(or stock and securities) of Controlled that qualifies under section
355(a) (or so much of section 356 as relates to section 355)
(Distribution). This section also provides rules limiting the amount of
Distributing's gain recognized under section 355(e) on a Distribution
if section 355(e) applies to an acquisition by one or more persons, as
part of a Plan, of stock that in the aggregate represents a 50-percent
or greater interest (Planned 50-percent Acquisition) of a Predecessor
of Distributing, or a Planned 50-percent Acquisition of Distributing.
In addition, this section provides rules regarding the application of
section 336(e) to a Distribution to which this section applies. This
section also provides rules regarding the application of section 355(f)
to a Distribution in certain cases.
(2) Overview--(i) Purposes and conceptual overview. Paragraph
(a)(3) of this section summarizes the two principal purposes of this
section and sets forth a brief conceptual overview of the scenarios in
which a corporation may be a Predecessor of Distributing.
(ii) References to and definitions of terms used in this section.
Paragraph (a)(4) of this section provides rules regarding references to
the terms Distributing, Controlled, Distribution, Plan, and Plan Period
for purposes of section 355(e), Sec. 1.355-7, and this section.
Paragraph (a)(5) of this section lists the terms used in this section
and indicates where each term is defined. Paragraph (b) of this section
defines the term Predecessor of Distributing and several related terms.
Paragraph (c) of this section defines the terms Predecessor of
Controlled, Successor (of Distributing or Controlled), and Section 381
Transaction.
(iii) Special rules and examples. Paragraph (d) of this section
provides guidance with regard to acquisitions and deemed acquisitions
of stock if there is a Predecessor of Distributing or a Successor of
either Distributing or Controlled. Paragraph (e) of this section
provides two rules that may limit the amount of Distributing's gain on
a Distribution if there is a Predecessor of Distributing, as well as an
overall gain limitation. Paragraph (e) of this section also provides
guidance with respect to the application of section 336(e). Regardless
of whether there is a Predecessor of Distributing, Predecessor of
Controlled, or Successor of either Distributing or Controlled,
paragraph (f) of this section provides a special rule relating to
section 355(e)(2)(C), which provides that section 355(e) does not apply
to certain transactions within an Expanded Affiliated Group. Paragraph
(g) of this section provides rules coordinating the application of
section 355(f) with the rules of this section. Paragraph (h) of this
section contains examples that illustrate the rules of this section.
(3) Purposes of section; Predecessor of Distributing overview--(i)
Purposes. The rules in this section have two principal purposes. The
first is to ensure that section 355(e) applies to a Distribution if, as
part of a Plan, some of the assets of a Predecessor of Distributing are
transferred directly or indirectly to Controlled without full
recognition of gain, and the Distribution accomplishes a division of
the assets of the Predecessor of Distributing. The second is to ensure
that section 355(e) applies when there is a Planned 50-percent
Acquisition of a Successor of Distributing or Successor of Controlled.
The rules of this section must be interpreted and applied in a manner
that is consistent with and reasonably carries out the purposes of this
section.
(ii) Predecessor of Distributing overview. The term Predecessor of
Distributing is defined in paragraph (b) of this section. Only a
Potential Predecessor can be a Predecessor of Distributing. See
paragraph (b)(1)(i) of this section. A Potential Predecessor can be a
Predecessor of Distributing only if, as part of a Plan, the
Distribution accomplishes a division of the assets of the Potential
Predecessor. See paragraph (b)(1)(iii) of this section. Accordingly, in
the absence of that Plan, a Predecessor of Distributing cannot exist
for purposes of section 355(e). The detailed rules set forth in
paragraph (b) of this section provide that a Potential Predecessor the
assets of which are divided as part of a Plan may be a Predecessor of
Distributing in either of the following two scenarios:
(A) Relevant Property transferred to Controlled. As part of the
Plan, one or more of the Potential Predecessor's assets were
transferred to Controlled in one or more tax-deferred transactions
prior to the Distribution.
(B) Relevant Property includes Controlled Stock. The Potential
Predecessor's assets included Controlled stock that, as part of the
Plan, was
[[Page 69318]]
transferred to Distributing in one or more tax-deferred transactions
prior to the Distribution.
(4) References--(i) References to Distributing or Controlled. For
purposes of section 355(e), except as otherwise provided in this
section, any reference to Distributing or Controlled includes, as the
context may require, a reference to any Predecessor of Distributing or
any Predecessor of Controlled, respectively, or any Successor of
Distributing or Controlled, respectively. However, except as otherwise
provided in this section, a reference to a Predecessor of Distributing
or to a Successor of Distributing does not include a reference to
Distributing, and a reference to a Predecessor of Controlled or to a
Successor of Controlled does not include a reference to Controlled.
(ii) References to Plan or Distribution. Except as otherwise
provided in this section, references to a Plan in this section are
references to a plan within the meaning of Sec. 1.355-7. References to
a distribution in Sec. 1.355-7 include a reference to a Distribution
and other related pre-Distribution transactions that together effect a
division of the assets of a Predecessor of Distributing. In determining
whether a Distribution and a Planned 50-percent Acquisition of a
Predecessor of Distributing, Distributing (including any Successor
thereof), or Controlled (including any Successor thereof) are part of a
Plan, the rules of Sec. 1.355-7 apply. In applying those rules,
references to Distributing or Controlled in Sec. 1.355-7 generally
include references to any Predecessor of Distributing and any Successor
of Distributing, or any Successor of Controlled, as appropriate.
However, with regard to any possible Planned 50-percent Acquisition of
a Predecessor of Distributing, any agreement, understanding,
arrangement, or substantial negotiations with regard to the acquisition
of the stock of the Predecessor of Distributing is analyzed under Sec.
1.355-7 with regard to the actions of officers or directors of
Distributing or Controlled, controlling shareholders (as defined in
Sec. 1.355-7(h)(3)) of Distributing or Controlled, or a person acting
with permission of one of those parties. For purposes of the preceding
sentence, references in Sec. 1.355-7 to Distributing do not include
references to a Predecessor of Distributing. Therefore, the actions of
officers, directors, or controlling shareholders of a Predecessor of
Distributing, or of a person acting with the implicit or explicit
permission of one of those parties, are not considered unless those
parties otherwise would be treated as acting on behalf of Distributing
or Controlled under Sec. 1.355-7 (for example, if a Predecessor of
Distributing is a controlling shareholder of Distributing).
(iii) Plan Period. For purposes of this section, the term Plan
Period means the period that ends immediately after the Distribution
and begins on the earliest date on which any pre-Distribution step that
is part of the Plan is agreed to or understood, arranged, or
substantially negotiated by one or more officers or directors acting on
behalf of Distributing or Controlled, by controlling shareholders of
Distributing or Controlled, or by another person or persons with the
implicit or explicit permission of one or more of such officers,
directors, or controlling shareholders. For purposes of the preceding
sentence, references to Distributing and Controlled do not include
references to any Predecessor of Distributing, Predecessor of
Controlled, or Successor of Distributing or Controlled.
(5) List of definitions. This section uses the following terms,
which are defined where indicated--
(i) Acquiring Owner. Paragraph (d)(1)(i) of this section.
(ii) Controlled. Paragraph (a)(1) of this section.
(iii) Distributing. Paragraph (a)(1) of this section.
(iv) Distributing Gain Limitation Rule. Paragraph (e)(1)(ii) of
this section.
(v) Distribution. Paragraph (a)(1) of this section.
(vi) Division of Relevant Property Requirement. Paragraph
(b)(1)(iii) of this section.
(vii) Expanded Affiliated Group. Paragraph (b)(2)(ii)(B) of this
section.
(viii) Hypothetical Controlled. Paragraph (e)(2)(i) of this
section.
(ix) Hypothetical D/355(e) Reorganization. Paragraph (e)(2)(i) of
this section.
(x) Plan. Paragraph (a)(4)(ii) of this section.
(xi) Plan Period. Paragraph (a)(4)(iii) of this section.
(xii) Planned 50-percent Acquisition. Paragraph (a)(1) of this
section.
(xiii) POD Gain Limitation Rule. Paragraph (e)(1)(ii) of this
section.
(xiv) Potential Predecessor. Paragraph (b)(2)(ii)(A) of this
section.
(xv) Predecessor of Controlled. Paragraph (c)(1) of this section.
(xvi) Predecessor of Distributing. Paragraph (b)(1) of this
section.
(xvii) Reflection of Basis Requirement. Paragraph (b)(1)(ii)(B) of
this section.
(xviii) Relevant Equity. Paragraph (b)(2)(iv)(A) of this section.
(xix) Relevant Property. Paragraph (b)(2)(iv)(A) of this section.
(xx) Relevant Property Requirement. Paragraph (b)(1)(ii)(A) of this
section.
(xxi) Section 381 Transaction. Paragraph (c)(3) of this section.
(xxii) Separated Property. Paragraph (b)(2)(vii) of this section.
(xxiii) Statutory Recognition Amount. Paragraph (e)(1)(i) of this
section.
(xxiv) Substitute Asset. Paragraph (b)(2)(vi)(A) of this section.
(xxv) Successor. Paragraph (c)(2)(i) of this section.
(xxvi) Successor Transaction. Paragraph (c)(2)(i) of this section.
(xxvii) Underlying Property. Paragraph (b)(2)(viii) of this
section.
(b) Predecessor of Distributing--(1) Definition--(i) In general.
For purposes of section 355(e), a Potential Predecessor is a
predecessor of Distributing (Predecessor of Distributing) if, taking
into account the special rules of paragraph (b)(2) of this section--
(A) Both pre-Distribution requirements of paragraph (b)(1)(ii) of
this section are satisfied; and
(B) The post-Distribution requirement of paragraph (b)(1)(iii) of
this section is satisfied.
(ii) Pre-Distribution requirements--(A) Relevant Property
requirement. The requirement set forth in this paragraph (b)(1)(ii)(A)
(Relevant Property Requirement) is satisfied if, before the
Distribution, and as part of a Plan, either--
(1) Any Controlled stock distributed in the Distribution was
directly or indirectly acquired (or deemed acquired under the rules set
forth in paragraph (b)(2)(x) of this section) by Distributing in
exchange for any direct or indirect interest in Relevant Property--
(i) That is held directly or indirectly by Controlled immediately
before the Distribution; and
(ii) The gain on which (if any) was not recognized in full at any
point during the Plan Period; or
(2) Any Controlled stock that is distributed in the Distribution is
Relevant Property of the Potential Predecessor.
(B) Reflection of basis requirement. The requirement set forth in
this paragraph (b)(1)(ii)(B) (Reflection of Basis Requirement) is
satisfied if any Controlled stock that satisfies the Relevant Property
Requirement--
(1) Either--
(i) Had a basis prior to the Distribution that was determined in
whole or in part by reference to the basis of any Separated Property;
or
(ii) Is Relevant Property of the Potential Predecessor; and
(2) During the Plan Period prior to the Distribution, was neither
distributed in
[[Page 69319]]
a distribution to which section 355(e) applied nor transferred in a
transaction in which the gain (if any) on that Controlled stock was
recognized in full.
(iii) Post-Distribution requirement. The requirement set forth in
this paragraph (b)(1)(iii) (Division of Relevant Property Requirement)
is satisfied if, immediately after the Distribution, and as part of a
Plan, direct or indirect ownership of the Potential Predecessor's
Relevant Property has been divided between Controlled on the one hand,
and Distributing or the Potential Predecessor (or a successor to the
Potential Predecessor) on the other hand. For purposes of this
paragraph (b)(1)(iii), if Controlled stock that is distributed in the
Distribution is Relevant Property of a Potential Predecessor, then
Controlled is deemed to have received Relevant Property of the
Potential Predecessor.
(2) Additional definitions and rules related to paragraph (b)(1) of
this section--(i) References to Distributing and Controlled. For
purposes of the Relevant Property Requirement, the Reflection of Basis
Requirement, and the Division of Relevant Property Requirement,
references to Distributing and Controlled do not include references to
any Predecessor of Distributing, Predecessor of Controlled, or
Successor of Distributing or Controlled.
(ii) Potential Predecessor--(A) Potential Predecessor definition.
The term Potential Predecessor means a corporation, other than
Distributing or Controlled, if--
(1) As part of a Plan, the corporation transfers property to a
Potential Predecessor, Distributing, or a member of the same Expanded
Affiliated Group as Distributing in a Section 381 Transaction; or
(2) Immediately after completion of the Plan, the corporation is a
member of the same Expanded Affiliated Group as Distributing.
(B) Expanded Affiliated Group definition. The term Expanded
Affiliated Group means an affiliated group (as defined in section 1504
without regard to section 1504(b)).
(iii) Successors of Potential Predecessors. For purposes of the
Division of Relevant Property Requirement, if a Potential Predecessor
transfers property in a Section 381 Transaction to a corporation (other
than Distributing or Controlled) during the Plan Period, the
corporation is a successor to the Potential Predecessor.
(iv) Relevant Property; Relevant Equity--(A) In general. Except as
otherwise provided in this paragraph (b)(2)(iv) or in paragraph
(b)(2)(v) of this section, the term Relevant Property means any
property that was held, directly or indirectly, by the Potential
Predecessor during the Plan Period. The term Relevant Equity means
Relevant Property that is an equity interest in a corporation or a
partnership.
(B) Property held by Distributing. Except as provided in paragraph
(b)(2)(iv)(C) of this section, property held directly or indirectly by
Distributing (including Controlled stock) is Relevant Property of a
Potential Predecessor only to the extent that the property was
transferred directly or indirectly to Distributing during the Plan
Period, and it was Relevant Property of the Potential Predecessor
before the direct or indirect transfer(s). For example, if during the
Plan Period a subsidiary corporation of a Potential Predecessor merges
into Controlled in a reorganization under section 368(a)(1)(A) and
(2)(D), and, as a result, the Potential Predecessor directly or
indirectly owns Distributing stock received in the merger, the
subsidiary's assets held by Controlled are Relevant Property of that
Potential Predecessor.
(C) F reorganizations. For purposes of paragraph (b)(2)(iv)(B) of
this section, the transferor and transferee in any reorganization
described in section 368(a)(1)(F) (F reorganization) are treated as a
single corporation. Therefore, for example, Relevant Property acquired
during the Plan Period by a corporation that is a transferor (as to a
later F reorganization) is treated as having been acquired directly
(and from the same source) by the transferee (as to the later F
reorganization) during the Plan Period. In addition, any transfer (or
deemed transfer) of assets to Distributing in an F reorganization will
not cause the transferred assets to be treated as Relevant Property.
(v) Stock of Distributing as Relevant Property--(A) In general. For
purposes of the Division of Relevant Property Requirement, except as
provided in paragraph (b)(2)(v)(B) of this section, stock of
Distributing is not Relevant Property (and thus is not Relevant Equity)
to the extent that the Potential Predecessor becomes, as part of a
Plan, the direct or indirect owner of that stock as the result of the
transfer to Distributing of direct or indirect interests in the
Potential Predecessor's Relevant Property. For example, stock of
Distributing is not Relevant Property if it is acquired by a Potential
Predecessor as part of a Plan in an exchange to which section 351(a)
applies.
(B) Certain reorganizations. For purposes of the Division of
Relevant Property Requirement, stock of Distributing is Relevant
Property (and thus Relevant Equity) to the extent that the Potential
Predecessor becomes, as part of the Plan, the direct or indirect owner
of that stock as the result of a transaction described in section
368(a)(1)(E).
(vi) Substitute Asset--(A) In general. Subject to paragraph
(b)(2)(vi)(B) of this section, the term Substitute Asset means any
property that is held directly or indirectly by Distributing during the
Plan Period and was received, during the Plan Period, in exchange for
Relevant Property that was acquired directly or indirectly by
Distributing if all gain on the transferred Relevant Property is not
recognized on the exchange. For example, property received by
Controlled in exchange for Relevant Property in a transaction
qualifying under section 1031 is a Substitute Asset. In addition, stock
received by Distributing in a distribution qualifying under section
305(a) or section 355(a) on Relevant Equity is a Substitute Asset.
(B) Controlled stock received by Distributing--(1) In general.
Except as provided in paragraph (b)(2)(vi)(B)(2) of this section, stock
of Controlled received in exchange for a direct or indirect transfer of
Relevant Property by Distributing is not a Substitute Asset.
(2) Exception. If the basis in Controlled stock received or deemed
received in an exchange described in paragraph (b)(2)(vi)(B)(1) of this
section is determined in whole or in part by reference to the basis of
Relevant Equity the issuer of which ceases to exist for Federal income
tax purposes under the Plan, that Controlled stock constitutes a
Substitute Asset. See paragraph (b)(2)(x) of this section.
(C) Treatment as Relevant Property. For purposes of this section, a
Substitute Asset is treated as Relevant Property with the same
ownership and transfer history as the Relevant Property for which (or
with respect to which) it was received.
(vii) Separated Property. The term Separated Property means each
item of Relevant Property that is described in the Relevant Property
Requirement (regardless of whether the fair market value of the
Relevant Property exceeds its adjusted basis). However, if Relevant
Equity is Separated Property, Underlying Property associated with that
Relevant Equity is not treated as Separated Property. In addition, if
Distributing directly or indirectly acquires Relevant Equity in a
transaction in which gain is recognized in full, Underlying Property
associated with that Relevant Equity is not treated as Separated
Property.
[[Page 69320]]
(viii) Underlying Property. The term Underlying Property means
property directly or indirectly held by a corporation or partnership
any equity interest in which is Relevant Equity.
(ix) Multiple Predecessors of Distributing. If there are multiple
Potential Predecessors that satisfy the pre-Distribution requirements
and post-Distribution requirement of paragraph (b)(1) of this section,
each of those Potential Predecessors is a Predecessor of Distributing.
For example, a Potential Predecessor that transfers property to a
Predecessor of Distributing without full recognition of gain (and that
otherwise meets the requirements of paragraph (b)(1) of this section)
is also a Predecessor of Distributing if the applicable transfer
occurred as part of a Plan that existed at the time of such transfer.
(x) Deemed exchanges. For purposes of paragraph (b)(1)(ii) of this
section (regarding the Relevant Property Requirement and the Reflection
of Basis Requirement) and paragraph (b)(2)(vi) of this section
(regarding Substitute Assets), Distributing is treated as acquiring
Controlled stock in exchange for a direct or indirect interest in
Relevant Property if the basis of Distributing in that Controlled
stock, immediately after a transfer of the Relevant Property, is
determined in whole or in part by reference to the basis of that
Relevant Property immediately before the transfer. For example, if a
corporation transfers Relevant Property to Controlled in exchange for
Distributing stock in a transaction that qualifies as a reorganization
under section 368(a)(1)(C), then, for purposes of paragraphs (b)(1)(ii)
and (b)(2)(vi) of this section, Distributing is treated as acquiring
Controlled stock in exchange for a direct or indirect interest in
Relevant Property. See Sec. 1.358-6(c)(1).
(c) Additional definitions--(1) Predecessor of Controlled. Solely
for purposes of applying paragraph (f) of this section, a corporation
is a predecessor of Controlled (Predecessor of Controlled) if, before
the Distribution, it transfers property to Controlled in a Section 381
Transaction as part of a Plan. Other than for the purpose described in
the preceding sentence, no corporation can be a Predecessor of
Controlled. If multiple corporations satisfy the requirements of this
paragraph (c)(1), each of those corporations is a Predecessor of
Controlled. For example, a corporation that transfers property to a
Predecessor of Controlled in a Section 381 Transaction is also a
Predecessor of Controlled if the Section 381 Transaction occurred as
part of a Plan that existed at the time of such transaction.
(2) Successors--(i) In general. For purposes of section 355(e), a
successor (Successor) of Distributing or of Controlled is a corporation
to which Distributing or Controlled, respectively, transfers property
in a Section 381 Transaction after the Distribution (Successor
Transaction).
(ii) Determination of Successor status. More than one corporation
may be a Successor of Distributing or Controlled. For example, if
Distributing transfers property to another corporation (X) in a Section
381 Transaction, and X transfers property to another corporation (Y) in
a Section 381 Transaction, then each of X and Y is a Successor of
Distributing. In this case, the determination of whether Y is a
Successor of Distributing is made after the determination of whether X
is a Successor of Distributing.
(3) Section 381 Transaction. The term Section 381 Transaction means
a transaction to which section 381 applies.
(d) Special acquisition rules--(1) Deemed acquisitions of stock in
Section 381 Transactions--(i) Rule. This paragraph (d)(1)(i) applies to
each shareholder of the acquiring corporation immediately before a
Section 381 Transaction (Acquiring Owner). Each Acquiring Owner is
treated for purposes of this section as acquiring, in the Section 381
Transaction, stock representing an interest in the distributor or
transferor corporation, to the extent that the Acquiring Owner's
interest in the acquiring corporation immediately after the Section 381
Transaction exceeds the Acquiring Owner's direct or indirect interest
in the distributor or transferor corporation immediately before the
Section 381 Transaction.
(ii) Example. The example set forth in this paragraph (d)(1)(ii)
illustrates the application of the deemed acquisition rule in paragraph
(d)(1)(i) of this section. Assume that A held all of the stock of
Distributing, Distributing held a 25-percent interest in a Predecessor
of Distributing, and A held no direct interest, or other indirect
interest, in the Predecessor of Distributing immediately before a
Section 381 Transaction in which the Predecessor of Distributing
transfers its assets to Distributing. In the Section 381 Transaction,
the Predecessor of Distributing's shareholders (other than
Distributing) collectively receive a 10-percent interest in
Distributing (reducing A's interest in Distributing to 90 percent).
Under paragraph (d)(1)(i) of this section, A is treated as acquiring in
the Section 381 Transaction stock representing a 65-percent interest in
the Predecessor of Distributing. This is because A's 90-percent
interest in Distributing (the acquiring corporation in the Section 381
Transaction) immediately after the Section 381 Transaction exceeds A's
25-percent interest (held indirectly through Distributing) in the
Predecessor of Distributing (the transferor corporation in the Section
381 Transaction) immediately before the Section 381 Transaction by 65
percent. Similarly, each Acquiring Owner of a Successor of Distributing
is treated as acquiring, in the Successor Transaction, stock of
Distributing, to the extent that the Acquiring Owner's interest in the
Successor of Distributing immediately after the Successor Transaction
exceeds the Acquiring Owner's direct or indirect interest in
Distributing immediately before the Successor Transaction.
(2) Deemed acquisitions of stock after Section 381 Transactions.
For purposes of this section, after a Section 381 Transaction
(including a Successor Transaction), an acquisition of stock of an
acquiring corporation (including a deemed stock acquisition under
paragraph (d)(1)(i) of this section) is treated also as an acquisition
of an interest in the stock of the distributor or transferor
corporation. For example, an acquisition of the stock of Distributing
that occurs after a Section 381 Transaction is treated not only as an
acquisition of the stock of Distributing, but also as an acquisition of
the stock of any Predecessor of Distributing whose assets were acquired
by Distributing in the prior Section 381 Transaction. Similarly, an
acquisition of the stock of a Successor of Distributing that occurs
after the Successor Transaction is treated not only as an acquisition
of the stock of the Successor of Distributing, but also as an
acquisition of the stock of Distributing.
(3) Separate counting for Distributing and each Predecessor of
Distributing. The measurement of whether one or more persons have
acquired stock of any specific corporation in a Planned 50-percent
Acquisition is made separately from the measurement of any potential
Planned 50-percent Acquisition of any other corporation. Therefore,
there may be a Planned 50-percent Acquisition of a Predecessor of
Distributing even if there is no Planned 50-percent Acquisition of
Distributing. Similarly, there may be a Planned 50-percent Acquisition
of Distributing even if there is no Planned 50-percent Acquisition of a
Predecessor of Distributing.
(e) Special rules for limiting gain recognition--(1) Overview--(i)
Gain limitation. This paragraph (e) provides
[[Page 69321]]
rules that limit the amount of gain that must be recognized by
Distributing by reason of section 355(e) to an amount that is less than
the amount that Distributing otherwise would be required to recognize
under section 355(c)(2) or section 361(c)(2) (Statutory Recognition
Amount) in certain cases involving one or more Predecessors of
Distributing.
(ii) Multiple Planned 50-percent Acquisitions. If there are Planned
50-percent Acquisitions of multiple corporations (for example, two
Predecessors of Distributing), Distributing must recognize the
Statutory Recognition Amount with respect to each such corporation,
subject to the limitations in paragraph (e)(2) of this section relating
to a Planned 50-percent Acquisition of a Predecessor of Distributing
(POD Gain Limitation Rule) and paragraph (e)(3) of this section
relating to a Planned 50-percent Acquisition of Distributing
(Distributing Gain Limitation Rule), if applicable. The POD Gain
Limitation Rule and the Distributing Gain Limitation Rule are applied
separately to the Planned 50-percent Acquisition of each such
corporation to determine the amount of gain required to be recognized.
(iii) Statutory Recognition Amount limit; Section 336(e). Paragraph
(e)(4) of this section sets forth an overall gain limitation based on
the Statutory Recognition Amount. Paragraph (e)(5) of this section
clarifies the availability of an election under section 336(e) with
regard to certain Distributions.
(2) Planned 50-percent Acquisition of a Predecessor of
Distributing--(i) In general. If there is a Planned 50-percent
Acquisition of a Predecessor of Distributing, the amount of gain
recognized by Distributing by reason of section 355(e) as a result of
the Planned 50-percent Acquisition is limited to the amount of gain, if
any, that Distributing would have recognized if, immediately before the
Distribution, Distributing had engaged in the following transaction:
Distributing transferred all Separated Property received from the
Predecessor of Distributing to a newly formed corporation (Hypothetical
Controlled) in exchange solely for stock of Hypothetical Controlled in
a reorganization under section 368(a)(1)(D) and then distributed the
stock of Hypothetical Controlled to the shareholders of Distributing in
a transaction to which section 355(e) applied (Hypothetical D/355(e)
Reorganization). The computation in this paragraph (e)(2)(i) is applied
regardless of whether Distributing actually directly held the Separated
Property.
(ii) Operating rules. For purposes of applying paragraph (e)(2)(i)
of this section, the following rules apply:
(A) Separated Property other than Controlled stock. Each of the
basis and the fair market value of Separated Property other than stock
of Controlled treated as transferred by Distributing to a Hypothetical
Controlled in a Hypothetical D/355(e) Reorganization equals the basis
and the fair market value, respectively, of such property in the hands
of Controlled immediately before the Distribution.
(B) Controlled stock that is Separated Property. Each of the basis
and the fair market value of the stock of Controlled that is Separated
Property treated as transferred by Distributing to a Hypothetical
Controlled in a Hypothetical D/355(e) Reorganization equals the basis
and the fair market value, respectively, of such stock in the hands of
Distributing immediately before the Distribution.
(C) Anti-duplication rule. A Predecessor of Distributing's
Separated Property is taken into account for purposes of applying this
paragraph (e)(2) only to the extent such property was not taken into
account by Distributing in a Hypothetical D/355(e) Reorganization with
respect to another Predecessor of Distributing. Further, appropriate
adjustments must be made to prevent other duplicative inclusions of
section 355(e) gain under this paragraph (e) reflecting the same
economic gain.
(3) Planned 50-percent Acquisition of Distributing. This paragraph
(e)(3) applies if there is a Planned 50-percent Acquisition of
Distributing. In that case, the amount of gain recognized by
Distributing by reason of section 355(e) as a result of the Planned 50-
percent Acquisition is limited to the excess, if any, of the Statutory
Recognition Amount over the amount of gain, if any, that Distributing
would have been required to recognize under paragraphs (e)(1)(ii) and
(e)(2) of this section if there had been a Planned 50-percent
Acquisition of every Predecessor of Distributing, but not of
Distributing or Controlled. For purposes of this paragraph (e)(3),
references to Distributing are not references to a Predecessor of
Distributing.
(4) Gain recognition limited to Statutory Recognition Amount. The
sum of the amounts required to be recognized by Distributing under
section 355(e) (taking into account the POD Gain Limitation Rule and
the Distributing Gain Limitation Rule) with regard to a single
Distribution cannot exceed the Statutory Recognition Amount. In
addition, Distributing may choose not to apply the POD Gain Limitation
Rule or the Distributing Gain Limitation Rule to a Distribution, and
instead may recognize the Statutory Recognition Amount. Distributing
indicates its choice to apply the preceding sentence by reporting the
Statutory Recognition Amount on its original or amended Federal income
tax return for the year of the Distribution.
(5) Section 336(e) election. Distributing is not eligible to make a
section 336(e) election (as defined in Sec. 1.336-1(b)(11)) with
respect to a Distribution to which this section applies unless
Distributing would, absent the making of a section 336(e) election,
recognize the Statutory Recognition Amount with respect to the
Distribution (taking into account the POD Gain Limitation Rule and the
Distributing Gain Limitation Rule) without regard to the final two
sentences of paragraph (e)(4) of this section. See Sec. Sec. 1.336-1
through 1.336-5 for additional requirements with regard to a section
336(e) election.
(f) Predecessor or Successor as a member of the affiliated group.
For purposes of section 355(e)(2)(C), if a corporation transfers its
assets to a member of the same Expanded Affiliated Group in a Section
381 Transaction, the transferor will be treated as continuing in
existence within the same Expanded Affiliated Group.
(g) Inapplicability of section 355(f) to certain intra-group
Distributions--(1) In general. Section 355(f) does not apply to a
Distribution if there is a Planned 50-percent Acquisition of a
Predecessor of Distributing (but not of Distributing, Controlled, or
their Successors), except as provided in paragraph (g)(2) of this
section. Therefore, except as provided in paragraph (g)(2) of this
section, section 355 (or so much of section 356 as relates to section
355) and the regulations under sections 355 and 356, including the POD
Gain Limitation Rule, apply, without regard to section 355(f), to a
Distribution within an affiliated group (as defined in section 1504(a))
if the Distribution and the Planned 50-percent Acquisition of the
Predecessor of Distributing are part of a Plan. For purposes of this
paragraph (g)(1), references to a Distribution (and Distributing and
Controlled) include references to a distribution (and Distributing and
Controlled) to which section 355 would apply but for the application of
section 355(f).
(2) Alternative application of section 355(f). Distributing may
choose not to apply paragraph (g)(1) of this section to each
Distribution (that occurs under a Plan) to which section 355(f) would
[[Page 69322]]
otherwise apply absent paragraph (g)(1) of this section. Instead,
Distributing may apply section 355(f) to all such Distributions
according to its terms, but only if all members of the same Expanded
Affiliated Group report consistently the Federal income tax
consequences of the Distributions that are part of the Plan (determined
without regard to section 355(f)). In such a case, neither the POD Gain
Limitation Rule nor the Distributing Gain Limitation Rule is available
with regard to any applicable Distribution. Distributing indicates its
choice to apply section 355(f) consistently to all applicable
Distributions by reporting the Federal income tax consequences of each
Distribution in accordance with section 355(f) on its Federal income
tax return for the year of the Distribution.
(h) Examples. The following examples illustrate the principles of
this section. Unless the facts indicate otherwise, assume throughout
these examples that: Distributing (D) owns all the stock of Controlled
(C), and none of the shares of C held by D has a built-in loss; D
distributes the stock of C in a Distribution to which section 355(d)
does not apply; X, Y, and Z are individuals; each of D, D1, C, P, P1,
P2, and R is a corporation having one class of stock outstanding, and
none is a member of a consolidated group; and each transaction that is
part of a Plan defined in this section is respected as a separate
transaction under general Federal income tax principles. No inference
should be drawn from any example concerning whether any requirements of
section 355 are satisfied other than those of section 355(e) or whether
any general Federal income tax principles (including the step
transaction doctrine) are implicated by the example:
(1) Example 1: Predecessor of D and Planned 50-Percent
Acquisition of P--(i) Facts. X owns 100% of the stock of P, which
holds multiple assets. Y owns 100% of the stock of D. The following
steps occur as part of a Plan: P merges into D in a reorganization
under section 368(a)(1)(A). Immediately after the merger, X and Y
own 10% and 90%, respectively, of the stock of D. D then contributes
to C one of the assets (Asset 1) acquired from P in the merger. At
the time of the contribution, Asset 1 has a basis of $40x and a fair
market value of $110x. In exchange for Asset 1, D receives
additional C stock and $10x. D distributes the stock of C (but not
the cash) to X and Y, pro rata. The contribution and Distribution
constitute a reorganization under section 368(a)(1)(D), and D
recognizes $10x of gain under section 361(b) on the contribution.
Immediately before the Distribution, taking into account the $10x of
gain recognized by D on the contribution, Asset 1 has an adjusted
basis of $50x under section 362(b) and a fair market value of $110x,
and the stock of C held by D has a basis of $100x and a fair market
value of $200x.
(ii) Analysis--(A) P is a Predecessor of D. Under paragraph
(b)(1) of this section, P is a Predecessor of D. First, P is a
Potential Predecessor because, as part of a Plan, P transferred
property to D in a Section 381 Transaction. See paragraph
(b)(2)(ii)(A)(1) of this section. Second, both of the pre-
Distribution requirements and the post-Distribution requirement are
satisfied. The Relevant Property Requirement is satisfied because,
immediately before the Distribution and as part of a Plan, C holds P
Relevant Property (Asset 1) the gain on which was not recognized in
full at any point during the Plan Period, and some of the C stock
distributed in the Distribution was acquired by D in exchange for
Asset 1. See paragraph (b)(1)(ii)(A)(1) of this section. The
Reflection of Basis Requirement is satisfied because that C stock
had a basis prior to the Distribution that was determined in whole
or in part by reference to the basis of Separated Property (Asset
1), and was neither distributed in a distribution to which section
355(e) applied nor transferred in a transaction in which the gain on
that C stock was recognized in full during the Plan Period prior to
the Distribution. See paragraph (b)(1)(ii)(B) of this section. The
Division of Relevant Property Requirement is satisfied because
immediately after the Distribution, D continues to hold Relevant
Property of P, and therefore, as part of a Plan, P's Relevant
Property has been divided between C and D. See paragraph (b)(1)(iii)
of this section.
(B) Planned 50-percent Acquisition of P. Under paragraph
(d)(1)(i) of this section, Y is treated as acquiring stock
representing 90% of the voting power and value of P as a result of
the merger of P into D. Accordingly, there has been a Planned 50-
percent Acquisition of P.
(C) Gain limited. Without regard to the limitations in paragraph
(e) of this section, D would be required to recognize $100x of gain
($200x of aggregate fair market value minus $100x of aggregate basis
of the C stock held by D), the Statutory Recognition Amount
described in section 361(c)(2). However, under the POD Gain
Limitation Rule, D's gain recognized by reason of the Planned 50-
percent Acquisition of P will not exceed $60x, an amount equal to
the amount of gain D would have recognized had D transferred Asset 1
(Separated Property) to a newly formed corporation (C1) solely for
C1 stock and distributed the C1 stock to D's shareholders in a
Hypothetical D/355(e) Reorganization. See paragraph (e)(2)(i) of
this section. For purposes of the computation in this paragraph
(h)(1)(ii)(C), the basis and fair market value of Asset 1 equal the
basis and fair market value of Asset 1 in the hands of C immediately
before the Distribution. See paragraph (e)(2)(ii)(A) of this
section. Under section 361(c)(2), D would recognize $60x of gain, an
amount equal to the gain in the hypothetical C1 stock (excess of the
$110x fair market value over the $50x basis). Therefore, D
recognizes $60x of gain (in addition to the $10x of gain recognized
under section 361(b)).
(iii) Plan not in existence at time of acquisition of Potential
Predecessor's property. The facts are the same as in paragraph
(h)(1)(i) of this section (Example 1) except that the merger of P
into D occurred before the existence of a Plan. Even though D
transferred P property (Asset 1) to C, Asset 1 was not Relevant
Property of P because P did not hold Asset 1 during the Plan Period.
See paragraphs (b)(2)(iv) and (a)(4)(iii) of this section. Because
Asset 1 is not Relevant Property, D did not receive C stock
distributed in the Distribution in exchange for Relevant Property
when it contributed Asset 1 to C, none of the distributed C stock
had a basis prior to the Distribution that was determined in whole
or in part by reference to the basis of Separated Property, and C
did not hold Relevant Property immediately before the Distribution.
Further, Relevant Property of P has not been divided. Therefore, P
is not a Predecessor of D.
(2) Example 2: Planned 50-percent Acquisition of D, but not
Predecessor of D--(i) Facts. X owns 100% of the stock of P, which
holds multiple assets. Y owns 100% of the stock of D. The following
steps occur as part of a Plan: P merges into D in a reorganization
under section 368(a)(1)(A). Immediately after the merger, X and Y
own 90% and 10%, respectively, of the stock of D. D then contributes
to C one of the assets (Asset 1) acquired from P in the merger. In
exchange for Asset 1, D receives additional C stock. D distributes
the stock of C to X and Y, pro rata. The contribution and
Distribution constitute a reorganization under section 368(a)(1)(D).
Immediately before the Distribution, Asset 1 has a basis of $50x and
a fair market value of $110x, and the stock of C held by D has a
basis of $120x and a fair market value of $200x.
(ii) Analysis--(A) P is a Predecessor of D. Under paragraph
(b)(1) of this section, P is a Predecessor of D. First, P is a
Potential Predecessor because, as part of a Plan, P transferred
property to D in a Section 381 Transaction. See paragraph
(b)(2)(ii)(A)(1) of this section. Second, both of the pre-
Distribution requirements and the post-Distribution requirement are
satisfied. The Relevant Property Requirement is satisfied because,
immediately before the Distribution and as part of a Plan, C holds P
Relevant Property (Asset 1) the gain on which was not recognized in
full at any point during the Plan Period, and some of the C stock
distributed in the Distribution was acquired by D in exchange for
Asset 1. See paragraph (b)(1)(ii)(A)(1) of this section. The
Reflection of Basis Requirement is satisfied because that C stock
had a basis prior to the Distribution that was determined in whole
or in part by reference to the basis of Separated Property (Asset
1), and was neither distributed in a distribution to which section
355(e) applied nor transferred in a transaction in which the gain on
that C stock was recognized in full during the Plan Period prior to
the Distribution. See paragraph (b)(1)(ii)(B) of this section. The
Division of Relevant Property Requirement is satisfied because
immediately after the Distribution, D continues to hold Relevant
Property of P, and therefore, as part of a Plan, P's Relevant
Property has been divided between C and D. See paragraph (b)(1)(iii)
of this section.
(B) Planned 50-percent Acquisition of D. Under paragraph
(d)(1)(i) of this section, Y is
[[Page 69323]]
treated as acquiring stock representing 10% of the voting power and
value of P as a result of the merger of P into D. The 10%
acquisition of P stock does not cause section 355(e) gain
recognition or cause application of the POD Gain Limitation Rule
because there has not been a Planned 50-percent Acquisition of P. X
acquires 90% of the voting power and value of D as a result of the
merger of P into D. Accordingly, there has been a Planned 50-percent
Acquisition of D. This Planned 50-percent Acquisition implicates
section 355(e) and results in gain recognition, subject to the rules
of paragraph (e) of this section.
(C) Gain limited. Without regard to the limitations in paragraph
(e) of this section, D would be required to recognize $80x of gain
($200x of fair market value minus $120x of basis of the C stock held
by D), the Statutory Recognition Amount described in section
361(c)(2). However, under the Distributing Gain Limitation Rule, D's
gain recognized by reason of the Planned 50-percent Acquisition of D
will not exceed $20x, the excess of the Statutory Recognition Amount
($80x) over the amount of gain that D would have been required to
recognize under the POD Gain Limitation Rule if there had been a
Planned 50-percent Acquisition of P but not D or C ($60x). See
paragraph (e)(3) of this section. The hypothetical gain limitation
under the POD Gain Limitation Rule equals the amount D would have
recognized had it transferred Asset 1 (Separated Property) to a
newly formed corporation (C1) solely for stock and distributed the
C1 stock in a Hypothetical D/355(e) Reorganization. See paragraph
(e)(2)(i) of this section. Under section 361(c)(2), D would
recognize $60x of gain, an amount equal to the gain in the
hypothetical C1 stock (excess of the $110x fair market value over
the $50x basis). Therefore, D recognizes $20x of gain ($80x-$60x).
(3) Example 3: Predecessor of D owns C stock--(i) Facts. X owns
100% of the stock of P, which holds multiple assets, including Asset
2. Y owns 100% of the stock of D. P owns 35% of the stock of C
(Block 1), and D owns the remaining 65% of the C stock (Block 2).
The following steps occur as part of a Plan: P merges into D in a
reorganization under section 368(a)(1)(A), and D immediately
thereafter distributes all of the C stock to X and Y pro rata.
Immediately after the merger, X and Y own 10% and 90%, respectively,
of the D stock, and, prior to the Distribution, D owns Block 1 with
a basis of $30x and a fair market value of $35x, and Block 2 with a
basis of $10x and a fair market value of $65x. D continues to hold
Asset 2.
(ii) Analysis--(A) P is a Predecessor of D. Under paragraph
(b)(1) of this section, P is a Predecessor of D. First, P is a
Potential Predecessor because, as part of a Plan, P transferred
property to D in a Section 381 Transaction. See paragraph
(b)(2)(ii)(A)(1) of this section. Second, both of the pre-
Distribution requirements and the post-Distribution requirement are
satisfied. The Relevant Property Requirement is satisfied because
some of the C stock distributed in the Distribution (Block 1) was
Relevant Property of P. See paragraph (b)(1)(ii)(A)(2) of this
section. The Reflection of Basis Requirement is satisfied because
Block 1 of the C stock is Relevant Property of P, and was neither
distributed in a distribution to which section 355(e) applied nor
transferred in a transaction in which the gain on that C stock was
recognized in full during the Plan Period prior to the Distribution.
See paragraph (b)(1)(ii)(B) of this section. The Division of
Relevant Property Requirement is satisfied because some of the C
stock distributed in the Distribution was Relevant Property of P,
and therefore C is deemed to have received Relevant Property of P,
and D continues to hold Relevant Property of P immediately after the
Distribution. See paragraph (b)(1)(iii) of this section. Therefore,
as part of a Plan, P's Relevant Property has been divided between C
and D.
(B) Planned 50-percent Acquisition of P. Under paragraph
(d)(1)(i) of this section, Y is treated as acquiring stock
representing 90% of the voting power and value of P as a result of
the merger of P into D. Accordingly, there has been a Planned 50-
percent Acquisition of P.
(C) Gain limited. Without regard to the limitations in paragraph
(e) of this section, D would be required to recognize $60x of gain
($100x of fair market value minus $40x of basis of the C stock held
by D), the Statutory Recognition Amount under section 355(c)(2).
However, under the POD Gain Limitation Rule, D's gain recognized by
reason of the Planned 50-percent Acquisition of P will not exceed
$5x, an amount equal to the amount D would have recognized had it
transferred Block 1 of the C stock (Separated Property) to a newly
formed corporation (C1) solely for stock and distributed the C1
stock to D shareholders in a Hypothetical D/355(e) Reorganization.
See paragraph (e)(2)(i) of this section. Because Relevant Equity
(Block 1 of the C stock) is Separated Property, Underlying Property
associated with that Relevant Equity is not treated as Separated
Property. See paragraph (b)(2)(vii) of this section. For purposes of
the computation in this paragraph (h)(3)(ii)(C), the basis and fair
market value of the Block 1 C stock equal its basis and fair market
value in the hands of D immediately before the Distribution. See
paragraph (e)(2)(ii)(A) of this section. Under section 361(c)(2), D
would recognize $5x of gain, an amount equal to the gain in the
hypothetical C1 stock ($35x fair market value-$30x basis).
Therefore, D recognizes $5x of gain.
(4) Example 4: C stock as Substitute Asset--(i) Facts. X owns
100% of the stock of P, which owns multiple assets, including 100%
of the stock of R and Asset 2. Y owns 100% of the stock of D. The
following steps occur as part of a Plan: P merges into D in a
reorganization under section 368(a)(1)(A) (P-D reorganization).
Immediately after the merger, X and Y own 10% and 90%, respectively,
of the stock of D. D then causes R to transfer all of its assets to
C and liquidate in a reorganization under section 368(a)(1) (R-C
reorganization). At the time of the P-D reorganization, the R stock
has a basis of $40x and a fair market value of $110x. D distributes
the stock of C to X and Y, pro rata. D continues to directly hold
Asset 2. Immediately before the Distribution, the C stock held by D
that was deemed received in the R-C reorganization (Block 1) has a
basis of $40x and a fair market value of $110x, and all of the stock
of C held by D has a basis of $100x and a fair market value of
$200x.
(ii) Analysis--(A) P is a Predecessor of D. Under paragraph
(b)(1) of this section, P is a Predecessor of D. First, P is a
Potential Predecessor because, as part of a Plan, P transferred
property to D in a Section 381 Transaction. See paragraph
(b)(2)(ii)(A)(1) of this section. Second, both pre-Distribution
requirements and the post-Distribution requirement are satisfied.
The Relevant Property Requirement is satisfied because, for the
following two reasons, some of the C stock distributed in the
Distribution (Block 1) was Relevant Property of P. D is treated as
acquiring Block 1 of the C stock in exchange for a direct or
indirect interest in R stock (that is, Relevant Property) in the R-C
reorganization because the basis of D in that C stock immediately
after a transfer of the R stock (in the liquidation of R) is
determined in whole or in part by reference to the basis of the R
stock immediately before the transfer. See paragraph (b)(2)(x) of
this section. Further, because the basis in Block 1 of the C stock
is determined in whole or in part by reference to the basis of
Relevant Equity (the R stock) the issuer of which ceases to exist
for Federal income tax purposes under the Plan, Block 1 of the C
stock is a Substitute Asset, and is therefore treated as Relevant
Property with the same ownership and transfer history as the R
stock. See paragraph (b)(2)(vi)(B)(2) of this section. The
Reflection of Basis Requirement is satisfied because Block 1 of the
C stock is Relevant Property of P, and was neither distributed in a
distribution to which section 355(e) applied nor transferred in a
transaction in which the gain on that C stock was recognized in full
during the Plan Period prior to the Distribution. See paragraph
(b)(1)(ii)(B) of this section. The Division of Relevant Property
Requirement is satisfied because some of the C stock distributed in
the Distribution was Relevant Property of P, and therefore C is
deemed to have received Relevant Property of P, and immediately
after the Distribution, D continues to hold Asset 2, which is
Relevant Property of P. See paragraph (b)(1)(iii) of this section.
Therefore, as part of a Plan, P's Relevant Property has been divided
between C and D.
(B) Planned 50-percent Acquisition of P. Under paragraph
(d)(1)(i) of this section, Y is treated as acquiring stock
representing 90% of the voting power and value of P as a result of
the P-D reorganization. Accordingly, there has been a Planned 50-
percent Acquisition of P.
(C) Gain limited. Without regard to the limitations in paragraph
(e) of this section, D would be required to recognize $100x of gain
($200x of fair market value minus $100x of basis of all C stock held
by D), the Statutory Recognition Amount described in section
355(c)(2). However, under the POD Gain Limitation Rule, D's gain
recognized by reason of the Planned 50-percent Acquisition of P will
not exceed $70x, an amount equal to the amount D would have
recognized had it transferred Block 1 of the C stock (Separated
Property) to a newly formed corporation (C1) solely for stock and
[[Page 69324]]
distributed the C1 stock to D shareholders in a Hypothetical D/
355(e) Reorganization. See paragraph (e)(2)(i) of this section.
Because Relevant Equity (Block 1 of the C stock) is Separated
Property, Underlying Property associated with that Relevant Equity
is not treated as Separated Property. See paragraph (b)(2)(vii) of
this section. Under section 361(c)(2), D would recognize $70x of
gain, an amount equal to the gain in the hypothetical C1 stock
(excess of the $110x fair market value over the $40x basis).
Therefore, D recognizes $70x of gain.
(5) Example 5: Section 351 transaction--(i) Facts. X owns 100%
of the stock of P, which holds multiple assets, including Asset 1,
Asset 2, and Asset 3. Y owns 100% of the stock of D. The following
steps occur as part of a Plan: P transfers Asset 1 and Asset 2 to D
and Y transfers property to D in an exchange qualifying under
section 351. Immediately after the exchange, P and Y own 10% and
90%, respectively, of the stock of D. D then contributes Asset 1 to
C in exchange for additional C stock. D distributes all of the stock
of C to P and Y, pro rata. D continues to directly hold Asset 2, and
P continues to directly hold Asset 3. The contribution and
Distribution constitute a reorganization under section 368(a)(1)(D).
Immediately before the Distribution, Asset 1 has a basis of $40x and
a fair market value of $110x, and the stock of C held by D has a
basis of $100x and a fair market value of $200x. Following the
Distribution, and as part of the same Plan, Z acquires 51% of the P
stock.
(ii) Analysis--P is not a Predecessor of D. Under paragraph
(b)(1) of this section, P is not a Predecessor of D. P is not a
Potential Predecessor because P did not transfer property to a
Potential Predecessor, D, or a member of the same Expanded
Affiliated Group as D in a Section 381 Transaction and P is not a
member of the same Expanded Affiliated Group as D immediately after
completion of the Plan. See paragraph (b)(2)(ii) of this section.
Thus, P cannot be a Predecessor of D. See paragraph (b)(1)(i) of
this section.
(6) Example 6: Section 351 transaction after an acquisition of
P--(i) Facts. X owns 100% of the stock of P, which holds multiple
assets, including Asset 1 and Asset 2. Y owns 100% of the stock of
D, D owns 100% of the stock of D1, and D1 owns 100% of the stock of
C. D files a consolidated return for the affiliated group of which
it is the common parent. The following steps occur as part of a
Plan: D acquires 100% of the stock of P from X. P transfers Asset 1
and Asset 2 to D1 for D1 stock in an exchange qualifying under
section 351. See Sec. 1.1502-34. D1 contributes Asset 1 to C in
exchange for additional C stock. D1 distributes all of the stock of
C to D in exchange for D1 stock (First Distribution). D then
distributes all of the stock of C to Y (Second Distribution). D1
continues to directly hold Asset 2. Immediately before the First
Distribution, Asset 1 has a basis of $10x and a fair market value of
$60x, and the stock of C held by D1 has a basis of $100x and a fair
market value of $200x.
(ii) Analysis--(A) P is a Predecessor of D1. Under paragraph
(b)(1) of this section, P is a Predecessor of D1. First, P is a
Potential Predecessor of D1 because P is a member of the same
Expanded Affiliated Group as D1 immediately after completion of the
Plan. See paragraph (b)(2)(ii)(A)(2) of this section. The Relevant
Property Requirement is satisfied because, immediately before the
First Distribution and as part of a Plan, C holds P Relevant
Property (Asset 1) the gain on which was not recognized in full at
any point during the Plan Period, and some of the C stock
distributed in the First Distribution was acquired by D1 in exchange
for Asset 1. See paragraph (b)(1)(ii)(A)(1) of this section. The
Reflection of Basis Requirement is satisfied because that C stock
had a basis prior to the First Distribution that was determined in
whole or in part by reference to the basis of Separated Property
(Asset 1), and was neither distributed in a distribution to which
section 355(e) applied nor transferred in a transaction in which the
gain on that C stock was recognized in full prior to the First
Distribution. See paragraph (b)(1)(ii)(B) of this section. The
Division of Relevant Property Requirement is satisfied because
immediately after the First Distribution, each of C, on the one
hand, and P or D1, on the other hand, continues to hold Relevant
Property of P, and therefore, as part of a Plan, P's Relevant
Property has been divided between C and D1. See paragraph
(b)(1)(iii) of this section.
(B) Planned 50-percent Acquisition of P. D has acquired stock
representing 100% of the voting power and value of P. Accordingly,
there has been a Planned 50-percent Acquisition of P.
(C) Gain on First Distribution. Because there is a Planned 50-
percent Acquisition of a Predecessor of Distributing (but not of
Distributing, Controlled, or their Successors), section 355(f) will
not apply to the First Distribution unless D and D1 choose to have
section 355(f) apply. See paragraph (g) of this section. As a
result, section 355, including the POD Gain Limitation Rule, will
apply to the First Distribution. Under the POD Gain Limitation Rule,
D1's gain recognized by reason of the Planned 50-percent Acquisition
of P will not exceed $50x, an amount equal to the amount D1 would
have recognized had it transferred Asset 1 (Separated Property) to a
newly formed corporation (C1) solely for stock and distributed the
C1 stock to D1 shareholders in a Hypothetical D/355(e)
Reorganization. See paragraph (e)(2)(i) of this section. Under
section 361(c)(2), D1 would recognize $50x of gain, an amount equal
to the gain in the hypothetical C1 stock (excess of the $60x fair
market value over the $10x basis). Therefore, D1 recognizes $50x of
gain. Under paragraph (g)(2) of this section, however, D and D1 may
choose to apply section 355(f) to the First Distribution as an
exception to the general application of paragraph (g)(1) of this
section. By application of section 355(f), section 355 (including
the POD Gain Limitation Rule) would not apply to the First
Distribution. Therefore, D1 would be required to recognize $100x of
gain (excess of the $200x fair market value over the $100x basis of
C stock held by D1) under section 311(b), and D would be treated
under section 302(d) as receiving a distribution of $200x to which
section 301 applies.
(D) P is not a Predecessor of D. Under paragraph (b)(1) of this
section, P is not a Predecessor of D. First, P is a Potential
Predecessor of D because P is a member of the same Expanded
Affiliated Group as D immediately after completion of the Plan. See
paragraph (b)(2)(ii)(A)(2) of this section. However, although the
Relevant Property Requirement is satisfied, the Reflection of Basis
Requirement is not satisfied. The Relevant Property Requirement is
satisfied because, immediately before the Second Distribution and as
part of a Plan, C holds P Relevant Property (Asset 1) the gain on
which was not recognized in full at any point during the Plan
Period, and some of the C stock distributed in the Second
Distribution was indirectly acquired by D in exchange for Asset 1.
See paragraph (b)(1)(ii)(A)(1) of this section. However, regardless
of whether D and D1 choose under paragraph (g)(2) of this section to
have section 355(f) apply to the First Distribution, the Reflection
of Basis Requirement cannot be satisfied. If section 355(f) applies
to the First Distribution, then all of the C stock will have been
transferred in a transaction in which the gain on the C stock was
recognized in full during the Plan Period prior to the Second
Distribution. If section 355(f) does not apply to the First
Distribution, then all of the C stock will have been transferred in
a distribution to which section 355(e) applied during the Plan
Period prior to the Second Distribution. Because not all of the pre-
Distribution and post-Distribution requirements are satisfied, P
cannot be a Predecessor of D.
(7) Example 7: Sequential Predecessors--(i) Facts. X owns 100%
of P1, which holds multiple assets, including Asset 1 and Asset 2. Y
owns 100% of P2, which holds Asset 3, and Z owns 100% of D. The
following steps occur as part of a Plan: P1 merges into P2 in a
reorganization under 368(a)(1)(A) (P1-P2 reorganization).
Immediately after the merger, X and Y own 10% and 90%, respectively,
of the stock of P2. P2 then merges into D in a reorganization under
368(a)(1)(A) (P2-D reorganization). Immediately after the merger, X,
Y, and Z own 1%, 9%, and 90%, respectively, of the stock of D. D
then contributes Asset 1 to C in exchange for additional C stock,
and retains Asset 2 and Asset 3. D distributes all of the stock of C
to X, Y, and Z, pro rata. Immediately before the Distribution, Asset
1 has a basis of $40x and a fair market value of $100x, and the
stock of C held by D has a basis of $100x and a fair market value of
$200x.
(ii) Analysis--(A) P2 is a Predecessor of D. Under paragraph
(b)(1) of this section, P2 is a Predecessor of D. First, P2 is a
Potential Predecessor because, as part of a Plan, P2 transferred
property to D in a Section 381 Transaction. See paragraph
(b)(2)(ii)(A)(1) of this section. Second, both pre-Distribution
requirements and the post-Distribution requirement are satisfied.
The Relevant Property Requirement is satisfied because, immediately
before the Distribution and as part of a Plan, C holds P2 Relevant
Property (Asset 1) the gain on which was not recognized in full at
any point during the Plan Period, and some of the C stock
distributed in the Distribution was acquired
[[Page 69325]]
by D in exchange for Asset 1. See paragraph (b)(1)(ii)(A)(1) of this
section. The Reflection of Basis Requirement is satisfied because
that C stock had a basis prior to the Distribution that was
determined in whole or in part by reference to the basis of
Separated Property (Asset 1), and was neither distributed in a
distribution to which section 355(e) applied nor transferred in a
transaction in which the gain on that C stock was recognized in full
during the Plan Period prior to the Distribution. See paragraph
(b)(1)(ii)(B) of this section. The Division of Relevant Property
Requirement is satisfied because immediately after the Distribution,
D continues to hold P2 Relevant Property (Asset 2 and Asset 3), and
therefore, as part of a Plan, P2's Relevant Property has been
divided between C and D. See paragraph (b)(1)(iii) of this section.
(B) P1 is a Predecessor of D. Under paragraph (b)(1) of this
section, P1 is a Predecessor of D. First, P1 is a Potential
Predecessor because, as part of a Plan, P1 transferred property to a
Potential Predecessor (P2) in a Section 381 Transaction. See
paragraph (b)(2)(ii)(A)(1) of this section. Second, both pre-
Distribution requirements and the post-Distribution requirement are
satisfied. The Relevant Property Requirement is satisfied because,
immediately before the Distribution and as part of a Plan, C holds
P1 Relevant Property (Asset 1) the gain on which was not recognized
in full at any point during the Plan Period, and some of the C stock
distributed in the Distribution was acquired by D in exchange for
Asset 1. See paragraph (b)(1)(ii)(A)(1) of this section. The
Reflection of Basis Requirement is satisfied because that C stock
had a basis prior to the Distribution that was determined in whole
or in part by reference to the basis of Separated Property (Asset
1), and was neither distributed in a distribution to which section
355(e) applied nor transferred in a transaction in which the gain on
that C stock was recognized in full during the Plan Period prior to
the Distribution. See paragraph (b)(1)(ii)(B) of this section. The
Division of Relevant Property Requirement is satisfied because
immediately after the Distribution, D continues to hold Relevant
Property of P1 (Asset 2), and therefore, as part of a Plan, P1's
Relevant Property has been divided between C and D. See paragraph
(b)(1)(iii) of this section.
(C) Planned 50-percent Acquisitions of P1 and P2. Under
paragraph (d)(1)(i) of this section, Y is treated as acquiring stock
representing 90% of the voting power and value of P1 as a result of
the P1-P2 merger. In addition, under paragraph (d)(1)(i) of this
section, Z is treated as acquiring stock representing 90% of the
voting power and value of P2 in the P2-D merger. Accordingly, there
have been Planned 50-percent Acquisitions of P1 and P2.
(D) Gain limited. Without regard to the limitations in paragraph
(e) of this section, D would be required to recognize $100x of gain
($200x of aggregate fair market value minus $100x of aggregate basis
of the C stock held by D), the Statutory Recognition Amount
described in section 361(c)(2), because there have been Planned 50-
percent Acquisitions of P1 and P2, both Predecessors of D. However,
under paragraph (e) of this section, D's gain recognized by reason
of the Planned 50-percent Acquisitions of P1 and P2 will not exceed
$60x, an amount equal to the amount D would have recognized had it
transferred Asset 1 (Separated Property) to a newly formed
corporation (C1) solely for stock and distributed the C1 stock to D
shareholders in a Hypothetical D/355(e) Reorganization. Under
section 361(c)(2), D would recognize $60x, an amount equal to the
gain in the hypothetical C1 stock (excess of the $100x fair market
value over the $40x basis). Paragraph (e)(1)(ii) of this section
provides that if there are Planned 50-percent Acquisitions of
multiple corporations, Distributing must recognize the Statutory
Recognition Amount with respect to each such corporation, subject to
the POD Gain Limitation Rule and the Distributing Gain Limitation
Rule, if applicable. In this case, the POD Gain Limitation Rule
limits the amount of gain required to be recognized by D with
respect to each of the Planned 50-percent Acquisitions of P1 and P2
to $60x. See paragraph (e)(2)(i) of this section. Ordinarily, each
$60x limitation would be added together, and the total gain
limitation provided by paragraph (e) of this section would be $120x.
However, the anti-duplication rule set forth in paragraph
(e)(2)(ii)(C) of this section provides that, for purposes of
applying the POD Gain Limitation Rule, a Predecessor of
Distributing's Separated Property is taken into account only to the
extent such property was not taken into account with respect to
another Predecessor of Distributing. Thus, Asset 1 may not be taken
into account more than once in determining the total gain
limitation. Therefore, D recognizes $60x of gain.
(8) Example 8: Multiple Predecessors of D--(i) Facts. X owns
100% of the stock of P1, which holds multiple assets, including
Asset 1 and Asset 3. Y owns 100% of the stock of P2, which holds
multiple assets, including Asset 2 and Asset 4. Z owns 100% of the
stock of D. The following steps occur as part of a Plan: Each of P1
and P2 merges into D in a reorganization under section 368(a)(1)(A).
Immediately after the mergers, each of X and Y owns 10%, and Z owns
80%, of the stock of D. D then contributes to C Asset 1 (acquired
from P1), and Asset 2 (acquired from P2). In exchange for Asset 1
and Asset 2, D receives additional C stock. D distributes the stock
of C to X, Y, and Z, pro rata. D's contribution of Asset 1 and Asset
2 and the Distribution constitute a reorganization under section
368(a)(1)(D). D continues to hold Asset 3 and Asset 4. Immediately
before the Distribution, Asset 1 has a basis of $50x and a fair
market value of $110x, Asset 2 has a basis of $70x and a fair market
value of $90x, and the stock of C held by D has a basis of $130x and
a fair market value of $220x.
(ii) Analysis--(A) P1 and P2 are Predecessors of D. Under
paragraph (b)(1) of this section, each of P1 and P2 is a Predecessor
of D. First, each of P1 and P2 is a Potential Predecessor because,
as part of a Plan, each of P1 and P2 transferred property to D in a
Section 381 Transaction. See paragraph (b)(2)(ii)(A)(1) of this
section. Second, both pre-Distribution requirements and the post-
Distribution requirement are satisfied. The Relevant Property
Requirement is satisfied because, immediately before the
Distribution and as part of a Plan, C holds P1 Relevant Property
(Asset 1) and P2 Relevant Property (Asset 2), the gain on each of
which was not recognized in full at any point during the Plan
Period, and some of the C stock distributed in the Distribution was
acquired by D in exchange for each of Asset 1 and Asset 2. See
paragraph (b)(1)(ii)(A)(1) of this section. The Reflection of Basis
Requirement is satisfied because that C stock had a basis prior to
the distribution that was determined in whole or in part by
reference to the basis of Separated Property (Asset 1 and Asset 2,
respectively), and was neither distributed in a distribution to
which section 355(e) applied nor transferred in a transaction in
which the gain on that C stock was recognized in full during the
Plan Period prior to the Distribution. See paragraph (b)(1)(ii)(B)
of this section. The Division of Relevant Property Requirement is
satisfied because immediately after the Distribution, D continues to
hold Relevant Property of P1 and P2, and therefore, as part of a
Plan, each of P1's and P2's Relevant Property has been divided
between C and D. See paragraph (b)(1)(iii) of this section.
(B) Planned 50-percent Acquisitions of P1 and P2. Under
paragraph (d)(1)(i) of this section, Z is treated as acquiring stock
representing 80% of the voting power and value of each of P1 and P2
as a result of the mergers of P1 and P2 into D. Accordingly, there
have been Planned 50-percent Acquisitions of P1 and P2.
(C) Gain limited. Without regard to the limitations in paragraph
(e) of this section, D would be required to recognize $90x of gain
($220x of fair market value minus $130x of basis of the C stock held
by D), the Statutory Recognition Amount under section 361(c)(2).
However, under the POD Gain Limitation Rule, D's gain recognized by
reason of the Planned 50-percent Acquisition of P1 will not exceed
$60x ($110x fair market value minus $50x basis), an amount equal to
the amount D would have recognized had it transferred Asset 1
(Separated Property) to a newly formed corporation (C1) solely for
stock and distributed the C1 stock to D shareholders in a
Hypothetical D/355(e) Reorganization. See paragraph (e)(2)(i) of
this section. In addition, under the POD Gain Limitation Rule, D's
gain recognized by reason of the deemed acquisition of P2 stock will
not exceed $20x ($90x fair market value minus $70x basis), an amount
equal to the amount D would have recognized had it transferred Asset
2 (Separated Property) to a second newly formed corporation (C2)
solely for stock and distributed the C2 stock to D shareholders in a
Hypothetical D/355(e) Reorganization. See paragraph (e)(2)(i) of
this section. Therefore, D recognizes $80x of gain ($60x + $20x).
See paragraph (e)(1)(ii) of this section.
(9) Example 9: Successor of C--(i) Facts. X owns 100% of the
stock of each of D and R. The following steps occur as part of a
Plan: D distributes all of its C stock to X. Immediately before the
Distribution, D's C
[[Page 69326]]
stock has a basis of $10x and a fair market value of $30x. C then
merges into R in a reorganization under section 368(a)(1)(D).
Immediately after the merger, X owns all of the R stock. As part of
the same Plan, Z acquires 51% of the stock of R from X.
(ii) Analysis--(A) R is a Successor of C. Under paragraph
(c)(2)(i) of this section, R is a Successor of C because, after the
Distribution, C transfers property to R in a Section 381
Transaction.
(B) Planned 50-percent Acquisition of C. Under paragraph (d)(2)
of this section, Z's acquisition of stock of R is treated as an
acquisition of stock of C. Therefore, Z is treated as acquiring 51%
of the stock of C. Accordingly, there has been a Planned 50-percent
Acquisition of C.
(C) Gain not limited. Section 355(e) applies to the Distribution
because there has been a Planned 50-percent Acquisition of C.
Neither the POD Gain Limitation Rule nor the Distributing Gain
Limitation Rule applies because there has been no Planned 50-percent
Acquisition of a Predecessor of D, and no Planned 50-percent
Acquisition of D. Therefore, D recognizes $20x of gain ($30x fair
market value minus $10x basis of the C stock held by D) under
section 355(c)(2).
(10) Example 10: Multiple Successors--(i) Facts. X owns 100% of
the stock of both D and R. Y owns 100% of the stock of S. The
following steps occur as part of a Plan: D distributes all of the C
stock to X. Immediately after the Distribution, D merges into R in a
reorganization under section 368(a)(1)(A) (D-R merger). Following
the D-R merger, R merges into S in a reorganization under section
368(a)(1)(A) (R-S merger). Immediately after the R-S merger, X and Y
own 10% and 90%, respectively, of the S stock. Immediately before
the Distribution, D's C stock has a basis of $10x and a fair market
value of $30x.
(ii) Analysis--(A) R and S are Successors of D. Under paragraph
(c)(2)(i) of this section, R is a Successor of D because, after the
Distribution, D transfers property to R in a Section 381
Transaction. Under paragraph (c)(2)(ii) of this section, S is also a
Successor of D because R (a Successor of D) transfers property to S
in a Section 381 Transaction.
(B) Planned 50-percent Acquisition of D. Under paragraph
(d)(1)(i) of this section, there is no deemed acquisition of D stock
as a result of the D-R merger because X wholly owns the stock of D
before the merger and wholly owns the stock of R after the merger.
Under paragraph (d)(1)(i) of this section, Y is treated as acquiring
stock representing 90% of the voting power and value of R (a
Successor of D) as a result of the R-S merger. Under paragraph
(d)(2) of this section, an acquisition of R stock is also treated as
an acquisition of D stock. Accordingly, there has been a Planned 50-
percent Acquisition of D.
(C) Gain not limited. Section 355(e) applies to the Distribution
because there has been a Planned 50-percent Acquisition of D. The
POD Gain Limitation Rule does not apply because there has been no
Planned 50-percent Acquisition of a Predecessor of D. The
Distributing Gain Limitation Rule applies because there has been a
Planned 50-percent Acquisition of D. However, the gain limitation
under the Distributing Gain Limitation Rule equals the Statutory
Recognition Amount, because there is no Predecessor of D (and thus
no Separated Property). Therefore, D recognizes $20x of gain ($30x
fair market value minus $10x basis of the C stock held by D) under
section 355(c)(2).
(i) Applicability date. This section applies to Distributions
occurring after December 15, 2019. For Distributions occurring on or
before December 15, 2019, see Sec. 1.355-8T as contained in 26 CFR
part 1 revised as of April 1, 2019.
Douglas W. O'Donnell,
Acting Deputy Commissioner for Services and Enforcement.
Approved: December 9, 2019.
David J. Kautter,
Assistant Secretary of the Treasury (Tax Policy).
[FR Doc. 2019-27110 Filed 12-16-19; 4:15 pm]
BILLING CODE 4830-01-P
