Guidance Under Section 355(e) Regarding Predecessors, Successors, and Limitation on Gain Recognition; Guidance Under Section 355(f)

CourtInternal Revenue Service
Citation84 FR 69308
Record Number2019-27110
Published date18 December 2019
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.
                -----------------------------------------------------------------------
                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
                

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