[Code of Federal Regulations]
[Title 26, Volume 4]
[Revised as of April 1, 2004]
From the U.S. Government Printing Office via GPO Access
[CITE: 26CFR1.367(e)-2]

[Page 323-332]
 
                       TITLE 26--INTERNAL REVENUE
 
    CHAPTER I--INTERNAL REVENUE SERVICE, DEPARTMENT OF THE TREASURY 
                               (CONTINUED)
 
PART 1_INCOME TAXES--Table of Contents
 
Sec. 1.367(e)-2  Distributions described in section 367(e)(2).

    (a) Purpose and scope--(1) In general. This section provides rules 
requiring gain and loss recognition by a corporation on its distribution 
of property to a foreign corporation in a complete liquidation described 
in section 332. Paragraph (b)(1) of this section contains the general 
rule that gain and loss are recognized when a domestic corporation makes 
a distribution of property in complete liquidation under section 332 to 
a foreign corporation that meets the stock ownership requirements of 
section 332(b) with respect to stock in the domestic corporation. 
Paragraph (b)(2) of this section provides the only exceptions to the 
gain and loss recognition rule of paragraph (b)(1) of this section.

[[Page 324]]

Paragraph (b)(3) of this section refers to other consequences of 
distributions described in paragraphs (b)(1) and (2) of this section. 
Paragraph (c)(1) of this section contains the general rule that gain and 
loss are not recognized when a foreign corporation makes a distribution 
of property in complete liquidation under section 332 to a foreign 
corporation that meets the stock ownership requirements of section 
332(b) with respect to stock in the foreign liquidating corporation. 
Paragraph (c)(2) of this section provides the only exceptions to the 
nonrecognition rule of paragraph (c)(1) of this section. Paragraph 
(c)(3) of this section refers to other consequences of distributions 
described in paragraphs (c)(1) and (2) of this section. Paragraph (d) of 
this section contains an anti-abuse rule. Finally, paragraph (e) of this 
section specifies the effective date for the rules of this section. The 
rules of this section are issued pursuant to the authority conferred by 
section 367(e)(2).
    (2) Nonapplicability of section 367(a). Section 367(a) shall not 
apply to a complete liquidation described in section 332 by a domestic 
liquidating corporation into a foreign corporation that meets the stock 
ownership requirements of section 332(b).
    (b) Distribution by a domestic corporation--(1) General rule--(i) 
Recognition of gain and loss. If a domestic corporation (domestic 
liquidating) makes a distribution of property in complete liquidation 
under section 332 to a foreign corporation (foreign distributee) that 
meets the stock ownership requirements of section 332(b) with respect to 
stock in the domestic liquidating corporation, then--
    (A) Pursuant to section 367(e)(2), section 337(a) and (b)(1) shall 
not apply; and
    (B) The domestic liquidating corporation shall recognize gain or 
loss on the distribution of property to the foreign distributee, except 
as provided in paragraph (b)(2) of this section.
    (ii) Operating rules--(A) General rule. Except as provided in 
paragraphs (b)(1)(ii) (B) and (C) of this section, the rules contained 
in section 336 will apply to the gain and loss recognized pursuant to 
this section.
    (B) Overall loss limitation--(1) Overall loss limitation rule. Loss 
in excess of gain from the distribution shall not be recognized. If 
realized losses exceed recognized losses, the losses shall be recognized 
on a pro rata basis with respect to the realized loss attributable to 
each distributed loss asset in the category of assets (i.e., capital or 
ordinary) to which the realized but unrecognized loss relates. For 
additional limitations on the recognition of losses, see, e.g., section 
1211.
    (2) Example. The following example illustrates the overall loss 
limitation rule, the pro rata loss allocation method, and the general 
capital loss limitation rule in section 1211(a):

    Example. F, a foreign corporation, owns all stock of US1, a domestic 
corporation. US1 owns the following capital assets: Asset A, which has a 
fair market value of $100 and an adjusted basis of $40; Asset B, which 
has a fair market value of $60 and an adjusted basis of $80; and, Asset 
C, which has a fair market value of $40 and an adjusted basis of $100. 
US1 also owns the following business assets that will generate ordinary 
income (or loss) upon disposition: Asset D, which has a fair market 
value of $100 and an adjusted basis of $40; Asset E, which has a fair 
market value of $60 and an adjusted basis of $100; and, Asset F, which 
has a fair market value of $40 and an adjusted basis of $80. US1 
liquidates into F and distributes all assets to F in liquidation. None 
of the assets qualify for nonrecognition under paragraph (b)(2) of this 
section. US1's total realized capital loss is $80, but it may only 
recognize $60 of that loss. See section 1211(a). US1's total realized 
ordinary loss is $80, but it may only recognize $60 of that loss. See 
paragraph (b)(1)(ii)(B)(1) of this section. US1 will allocate $15 (60 X 
.25) of the recognized capital loss to Asset B and will allocate the 
remaining $45 (60 X .75) of recognized capital loss to Asset C. See 
paragraph (b)(1)(ii)(B)(1) of this section. US1 will allocate $30 (60 X 
.50) of the recognized ordinary loss to Asset E and will allocate the 
remaining $30 (60 X .50) to Asset F. See paragraph (b)(1)(ii)(B)(1) of 
this section.

    (C) Special rules for built-in gains and losses attributable to 
property received in liquidations and reorganizations. Built-in losses 
attributable to property received in a transaction described in sections 
332 or 361 (during the two-year period ending on the date of the 
distribution in liquidation covered by this section) shall not offset 
gain from property not received in the same transaction.

[[Page 325]]

Built-in gains attributable to property received in a transaction 
described in sections 332 or 361 (during the two-year period ending on 
the date of the distribution in liquidation covered by this section) 
shall not be offset by a loss from property not received in the same 
transaction. Built-in gain or loss is that amount of gain or loss on 
property that existed at the time the domestic liquidating corporation 
acquired such property. See sections 336(d) and 382 for additional 
limitations on the recognition of losses.
    (iii) Distribution of partnership interest--(A) General rule. If a 
domestic corporation distributes a partnership interest (whether foreign 
or domestic) in a distribution described in paragraph (b)(1)(i) of this 
section, then for purposes of applying this section the domestic 
liquidating corporation shall be treated as having distributed a 
proportionate share of partnership property. Accordingly, the 
applicability of the recognition rules of paragraphs (b)(1) (i) and (ii) 
of this section, and of any exception to recognition provided in this 
section shall be determined with reference to the partnership property, 
rather than to the partnership interest itself. Where the partnership 
property includes an interest in a lower-tier partnership, the 
applicability of any exception with respect to the interest in the 
lower-tier partnership shall be determined with reference to the lower-
tier partnership property. In the case of multiple tiers of 
partnerships, the applicability of an exception shall be determined with 
reference to the property of each partnership, applying the rule 
contained in the preceding sentence. A domestic liquidating 
corporation's proportionate share of partnership property shall be 
determined under the rules and principles of sections 701 through 761 
and the regulations thereunder.
    (B) Gain or loss calculation. [Reserved]
    (C) Basis adjustments. The foreign distributee corporation's basis 
in the distributed partnership interest shall be equal to the domestic 
liquidating corporation's basis in such partnership interest immediately 
prior to the distribution, increased by the amount of gain and reduced 
by the amount of loss recognized by the domestic liquidating corporation 
on the distribution of the partnership interest. Solely for purposes of 
sections 743 and 754, the foreign distributee corporation shall be 
treated as having purchased the partnership interest for an amount equal 
to the foreign corporation's adjusted basis therein.
    (D) Publicly traded partnerships. The distribution by a domestic 
liquidating corporation of an interest in a publicly traded partnership 
that is treated as a corporation for U.S. income tax purposes under 
section 7704(a) shall not be subject to the rules of paragraphs 
(b)(1)(iii) (A) and (B) of this section. Instead, the distribution of 
such an interest shall be treated in the same manner as a distribution 
of stock. Thus, a transfer of an interest in a publicly traded 
partnership that is treated as a U.S. corporation for U.S. income tax 
purposes shall be treated in the same manner as stock in a domestic 
corporation, and a transfer of an interest in a publicly traded 
partnership that is treated as a foreign corporation for U.S. income tax 
purposes shall be treated in the same manner as stock in a foreign 
corporation.
    (2) Exceptions--(i) Distribution of property used in a U.S. trade or 
business--(A) Conditions for nonrecognition. A domestic liquidating 
corporation shall not recognize gain or loss under paragraph (b)(1) of 
this section on its distribution of property (including inventory) used 
by the domestic liquidating corporation in the conduct of a trade or 
business within United States, if--
    (1) The foreign distributee corporation, immediately thereafter and 
for the ten-year period beginning on the date of the distribution of 
such property, uses the property in the conduct of a trade or business 
within the United States;
    (2) The domestic liquidating corporation attaches the statement 
described in paragraph (b)(2)(i)(C) of this section to its U.S. income 
tax returns for the taxable years that include the distributions in 
liquidation; and
    (3) The foreign distributee corporation attaches a copy of the 
property description contained in paragraph (b)(2)(i)(C)(2) of this 
section to its U.S. income tax return for the tax year that includes the 
date of distribution.

[[Page 326]]

    (B) Qualifying property. Property is used by the foreign distributee 
corporation in the conduct of a trade or business in the United States 
within the meaning of this paragraph (b)(2)(i) only if all income from 
the use of the property and all income or gain from the sale or exchange 
of the property would be subject to taxation under section 882(a) as 
effectively connected income. Also, stock held by a dealer as inventory 
or for sale in the ordinary course of its trade or business shall be 
treated as inventory and not as stock in the hands of both the domestic 
liquidating corporation and the distributee foreign corporation. 
Notwithstanding the foregoing, the exception provided in this paragraph 
(b)(2)(i) shall not apply to intangibles described in section 
936(h)(3)(B).
    (C) Required statement. The statement required by paragraph 
(b)(2)(i)(A) of this section shall be entitled ``Required Statement 
under Sec. 1.367(e)-2(b)(2)(i)'' and shall be prepared by the domestic 
liquidating corporation and signed under penalties of perjury by an 
authorized officer of the domestic liquidating corporation and by an 
authorized officer of the foreign distributee corporation. The statement 
shall contain the following items:
    (1) Declaration and certification. A declaration that the 
distribution to the foreign distributee corporation is one to which the 
rules of this paragraph (b)(2)(i) apply and a certification that the 
domestic liquidating corporation and the foreign distributee corporation 
agree to all of the terms and conditions set forth in this paragraph 
(b)(2)(i).
    (2) Property description. A description of all property distributed 
by the domestic liquidating corporation (irrespective of whether the 
property qualifies for nonrecognition). Such description shall be 
entitled ``Master Property Description'' and shall identify the property 
that continues to be used by the foreign distributee corporation in the 
conduct of a trade or business within the United States, including the 
location, adjusted basis, estimated fair market value, a summary of the 
method (including appraisals if any) used for determining such value, 
and the date of distribution of such items of property. The description 
shall also identify the property excepted from gain recognition under 
paragraphs (b)(2)(ii) and (iii) of this section.
    (3) Distributee identification. An identification of the foreign 
distributee corporation, including its name and address, taxpayer 
identification number, residence, and place of incorporation.
    (4) Treaty benefits waiver. With respect to property entitled to 
nonrecognition pursuant to this paragraph (b)(2)(i), a declaration by 
the foreign distributee corporation that it irrevocably waives any right 
under any treaty (whether or not currently in force at the time of the 
liquidation) to sell or exchange any item of such property without U.S. 
income taxation or at a reduced rate of taxation, or to derive income 
from the use of any item of such property without U.S. income taxation 
or at a reduced rate of taxation.
    (5) Statute of limitations extension. An agreement by the domestic 
liquidating corporation and the foreign distributee corporation to 
extend the statute of limitations on assessments and collections (under 
section 6501) with respect to the domestic liquidating corporation on 
the distribution of each item of property until three years after the 
date on which all such items of property have ceased to be used in a 
trade or business within the United States, but in no event shall the 
extension be for a period longer than 13 years from the filing of the 
original U.S. income tax return for the taxable year of the last 
distribution of any such item of property. The agreement to extend the 
statute of limitation shall be executed on a Form 8838, ``Consent to 
Extend the Time to Assess Tax Under Section 367--Gain Recognition 
Agreement.''
    (D) Failure to file statement. If a domestic liquidating corporation 
that would otherwise qualify for nonrecognition on the distribution of 
property under this paragraph (b)(2)(i) fails to file the statement 
described in paragraph (b)(2)(i)(C) of this section or files a statement 
that does not comply with the requirements of paragraph (b)(2)(i)(C) of 
this section, the Commissioner may treat the domestic liquidating 
corporation as if it had claimed nonrecognition under this paragraph 
(b)(2)(i) and met all the requirements of paragraph (b)(2)(i)(C) of this 
section,

[[Page 327]]

if such treatment is necessary to prevent the domestic liquidating 
corporation or the foreign distributee corporation from otherwise 
deriving a tax benefit by such failure.
    (E) Operating rules. By the domestic liquidating corporation's 
claiming nonrecognition under this paragraph (b)(2)(i) and filing a 
statement described in paragraph (b)(2)(i)(C) of this section, the 
domestic liquidating corporation and the foreign distributee corporation 
agree to be subject to the rules of this paragraph (b)(2)(i)(E).
    (1) Gain or loss recognition by the foreign distributee 
corporation--(i) Taxable dispositions. If, within the ten-year period 
from the date of a distribution of qualifying property, the foreign 
distributee corporation disposes of any qualifying property in a 
transaction subject to tax under section 882(a), then the foreign 
distributee corporation shall recognize such gain (or loss) and properly 
report it on a timely filed U.S. income tax return. If the foreign 
distributee corporation recognizes gain (or loss) under this paragraph 
(b)(2)(i)(E)(1)(i) and properly reports such gain (or loss) on its U.S. 
income tax return, then the domestic liquidating corporation shall not 
recognize gain attributable to such property under paragraph 
(b)(2)(i)(E)(2) of this section.
    (ii) Other triggering events. If, within the ten-year period from 
the date of distribution, any qualifying property ceases to be used by 
the foreign distributee corporation in the conduct of a trade or 
business in the United States (other than by reason of a taxable 
disposition described in paragraph (b)(2)(i)(E)(1)(i) of this section, a 
nontriggering event described in paragraph (b)(2)(i)(E)(4) of this 
section, or a nontriggering transfer described in paragraph 
(b)(2)(i)(E)(5) of this section), then the foreign distributee 
corporation shall recognize gain (but not loss) attributable to such 
property and properly report it on a timely filed U.S. income tax 
return. If the foreign distributee corporation properly reports gain 
under this paragraph (or if such qualified property is not gain property 
on the date that it ceases to be used in the foreign distributee 
corporation's U.S. trade or business), then the domestic liquidating 
corporation shall not recognize gain attributable to such property under 
paragraph (b)(2)(i)(E)(2) of this section. The gain recognized under 
this paragraph (b)(2)(i)(E)(1)(ii) shall be an amount equal to the fair 
market value of the property on the date it ceases to be used in the 
foreign distributee corporation's U.S. trade or business less the 
foreign distributee corporation's adjusted basis in such property.
    (2) Gain recognition by the domestic liquidating corporation--(i) 
General rule. If, within the ten-year period from the date of 
distribution, any qualifying property described in paragraph 
(b)(2)(i)(B) of this section ceases to be used by the foreign 
distributee corporation (or a qualifying transferee described in 
paragraph (b)(2)(i)(E)(5) of this section) in the conduct of a trade or 
business in the United States for any reason (including but not limited 
to the sale or exchange of such property or the removal of the property 
from conduct of the trade or business), then, except to the extent gain 
(or loss) is recognized under paragraph (b)(1)(i)(E)(1) of this section, 
the domestic liquidating corporation shall recognize the gain (but not 
loss) realized but not recognized upon the initial distribution of such 
item of property. The domestic liquidating corporation shall recognize 
gain pursuant to this paragraph (b)(2)(i)(E)(2)(i) on the amended U.S. 
income tax return described in paragraph (b)(2)(i)(E)(2)(ii) of this 
section.
    (ii) Amended return. If gain recognition is required pursuant to 
paragraph (b)(2)(i)(E)(2)(i) of this section, the foreign distributee 
corporation shall file an amended U.S. income tax return on behalf of 
the domestic liquidating corporation for the year of the distribution of 
such item of property. On the amended return, the domestic liquidating 
corporation may use any losses (or credits) existing in the year of the 
distribution to offset the gain recognized pursuant to paragraph 
(b)(2)(i)(E)(2)(i) of this section (or the tax thereon), provided that 
the losses (or credits) were otherwise available in the year 
distribution and were not used in another year. The amended return shall 
be filed no later than the due date

[[Page 328]]

(including extensions) for the return of the foreign distributee 
corporation for the taxable year in which the property ceases to be used 
by the foreign distributee corporation in the conduct of a trade or 
business in the United States.
    (iii) Interest. If the domestic liquidating corporation owes 
additional tax pursuant to paragraph (b)(2)(i)(E)(2)(i) of this section 
for the year of liquidation, then interest must be paid on that amount 
at the rates determined under section 6621. The interest due will be 
calculated from the due date of the domestic liquidating corporation's 
U.S. income tax return for the year of the distribution to the date on 
which the additional tax for that year is paid.
    (iv) Joint and several liability. The foreign distributee 
corporation shall be jointly and severally liable for any tax owed by 
the domestic liquidating corporation as a result of the application of 
this section, and shall succeed to the domestic liquidating 
corporation's agreement to extend the statute of limitations on 
assessments and collections under section 6501.
    (3) Schedule for property no longer used in a U.S. trade or 
business. If qualifying property (other than inventory) ceases to be 
used by the foreign distributee corporation in the conduct of a U.S. 
trade or business in the ten-year period beginning on the date of 
distribution of such property from the domestic liquidating corporation 
to the foreign distributee corporation, then the foreign distributee 
corporation shall list on a separate schedule (attached to its U.S. 
income tax return for the year of cessation) all such qualifying 
property. For purposes of this paragraph (b)(2)(i)(E)(3), property 
ceases to be used in a U.S. trade or business whenever such property is 
sold, exchanged, or otherwise removed from the U.S. trade or business, 
irrespective of whether the domestic liquidating corporation filed an 
amended return under paragraph (b)(2)(i)(E)(2) of this section, and 
irrespective of whether the property ceases to be used in the foreign 
distributee corporation's U.S. trade or business by virtue of a 
nontriggering event described in paragraph (b)(2)(i)(E)(4) of this 
section or a nontriggering transfer described in paragraph 
(b)(2)(i)(E)(5) of this section.
    (4) Nontriggering events--(i) Conversions, certain exchanges, and 
abandonment. Gain (or loss) under this paragraph (b)(2)(i)(E) shall not 
be triggered if qualifying property described in paragraph (b)(2)(i)(B) 
of this section is involuntarily converted into, or exchanged for, 
similar qualifying property used in the conduct of a trade or business 
in the United States, to the extent such conversion or exchange 
qualifies for nonrecognition under section 1033 or 1031. Also, the 
abandonment or disposal of worthless or obsolete property shall not 
trigger gain (or loss) under this paragraph (b)(2)(i)(E).
    (ii) Amendment to Master Property Description. If the foreign 
distributee corporation acquires replacement property by virtue of a 
conversion or exchange of the qualifying property under this paragraph 
(b)(2)(i)(E)(4), then the foreign distributee corporation shall attach 
to its U.S. income tax return for the year of the acquisition such 
replacement property a schedule entitled ``Amendment to Master Property 
Description Required by Sec. 1.367(e)-2(b)(2)(i)'' that lists the 
replacement property and the property being replaced.
    (5) Nontriggering transfers to qualified transferees. Gain (or loss) 
under this paragraph (b)(2)(i)(E) will not be triggered if qualifying 
property described in paragraph (b)(2)(i)(B) of this section is 
transferred to another person (qualified transferee) in a transaction 
qualifying for nonrecognition under the Internal Revenue Code (other 
than transactions described in paragraphs (b)(2)(i)(E)(4)(i) and (c)(1) 
of this section), if--
    (i) The qualified transferee (and all other subsequent qualified 
transferees), immediately thereafter and for the ten-year period 
beginning on the date of the initial distribution of such qualifying 
property from the domestic liquidating corporation to the foreign 
distributee corporation, uses the property in the conduct of a trade or 
business in the United States;
    (ii) The foreign distributee corporation (or its successor in 
interest) prepares and attaches to its U.S. income tax return for the 
year of transfer a

[[Page 329]]

statement entitled ``Required Statement under Sec. 1.367(e)-
2(b)(2)(i)(E)(5) for Property Transferred to a Qualified Transferee'' 
that is signed under penalties of perjury by an authorized officer of 
the foreign distributee corporation and by a person similarly authorized 
by the qualified transferee;
    (iii) The statement described in paragraph (b)(2)(i)(E)(5)(ii) of 
this section shall contain a description of all qualifying property 
transferred by the foreign distributee corporation (or qualified 
transferee) to the qualified transferee (or subsequent qualified 
transferee);
    (iv) The statement described in paragraph (b)(2)(i)(E)(5)(ii) of 
this section shall also contain an identification of the qualified 
transferee (or subsequent qualified transferee), including its name and 
address, taxpayer identification number, residence, and place of 
incorporation (if applicable);
    (v) The statement described in paragraph (b)(2)(i)(E)(5)(ii) of this 
section shall also contain a declaration by the qualifying transferee 
(or subsequent qualifying transferee) that it irrevocably waives any 
right under any treaty (whether or not currently in force at the time of 
the liquidation) to sell or exchange any item of such property without 
U.S. income taxation or at a reduced rate of taxation, or to derive 
income from the use of any item of such qualifying property without U.S. 
income taxation or at a reduced rate of taxation; and
    (vi) A declaration that the transfer to the qualifying transferee 
(or subsequent qualifying transferee) is one to which the rules of this 
paragraph (b)(2)(i)(E)(5) apply and a certification that the foreign 
distributee corporation (or its successor in interest) and the 
qualifying transferee (or subsequent qualifying transferee) agree to all 
of the terms and conditions set forth in paragraph (b)(2)(i)(E)(1) of 
this section, replacing ``foreign distributee corporation'' with 
``qualifying transferee'' and replacing references to ``section 882(a)'' 
with ``section 871(b)'' (as the case may be).
    (ii) Distribution of certain U.S. real property interests. A 
domestic liquidating corporation shall not recognize gain (or loss) 
under paragraph (b)(1) of this section on the distribution of a U.S. 
real property interest (other than stock in a former U.S. real property 
holding corporation that is treated as a U.S. real property interest for 
five years under section 897(c)(1)(A)(ii)). If property distributed by 
the domestic liquidating corporation is a U.S. real property interest 
that qualifies for nonrecognition under this paragraph (b)(2)(ii) in 
addition to nonrecognition provided by paragraph (b)(2)(i) of this 
section, then the domestic liquidating corporation shall secure 
nonrecognition pursuant to this paragraph (b)(2)(ii) and not pursuant to 
the provisions of paragraph (b)(2)(i) of this section.
    (iii) Distribution of stock of domestic subsidiary corporations--(A) 
Conditions for nonrecognition. A domestic liquidating corporation shall 
not recognize gain or loss under paragraph (b)(1) of this section on a 
distribution of stock of an 80 percent domestic subsidiary corporation, 
if the domestic liquidating corporation attaches a statement described 
in paragraph (b)(2)(iii)(D) of this section to its U.S. income tax 
return for the year of the distribution of such stock. For purposes of 
this paragraph (b)(2)(iii), a corporation is an 80 percent domestic 
subsidiary corporation, if--
    (1) The subsidiary corporation is a domestic corporation (but not a 
foreign corporation that has made an election under section 897(i) to be 
treated as a U.S. corporation for purposes of section 897);
    (2) The domestic liquidating corporation owns (directly and without 
regard to paragraph (b)(1)(iii) of this section) at least 80 percent of 
the total voting power of the stock of such corporation; and
    (3) The domestic liquidating corporation owns (directly and without 
regard to paragraph (b)(1)(iii) of this section) at least 80 percent of 
the total value of all stock of such corporation.
    (B) Exceptions when the liquidating corporation is a U.S. real 
property holding corporation. If the domestic liquidating corporation is 
a U.S. real property holding corporation (as defined in section 
897(c)(2)) at the time of liquidation (or is a former U.S. real property 
holding corporation the stock of which

[[Page 330]]

is treated as a U.S. real property interest for five years under section 
897(c)(1)(A)(ii)), then the exception in paragraph (b)(2)(iii)(A) of 
this section shall apply only to the distribution of stock of an 80 
percent domestic subsidiary corporation that is a U.S. real property 
holding corporation (as defined in section 897(c)(2)) at the time of the 
liquidation and immediately thereafter.
    (C) Anti-abuse rule. (1) The exception in paragraph (b)(2)(iii)(A) 
of this section shall not apply, if a principal purpose of the 
distribution of the 80 percent domestic subsidiary corporation's stock 
is the avoidance of U.S. tax that would have been imposed on the 
domestic liquidating corporation's disposition of such stock when taken 
together to an unrelated party. A distribution may have a principal 
purpose of tax avoidance even though the tax avoidance purpose is 
outweighed by other purposes (when taken together or separately).
    (2) For purposes of paragraph (b)(2)(iii)(C)(1) of this section, a 
distribution of stock of the 80 percent domestic subsidiary corporation 
will be deemed to have been made pursuant to a plan, one of the 
principal purposes of which was the avoidance of U.S. tax, if the 
foreign distributee corporation disposes of (whether in a recognition or 
nonrecognition transaction) any such stock within two years of such 
distribution. The rule in this paragraph (b)(2)(iii)(C)(2) will not 
apply if the foreign distributee corporation can demonstrate to the 
satisfaction of the Commissioner that the avoidance of U.S. tax was not 
a principal purpose of the liquidation.
    (D) Required statement. The statement required by paragraph 
(b)(2)(iii)(A) of this section shall be entitled ``Required Statement 
under Sec. 1.367(e)-2(b)(2)(iii) for Stock of 80 Percent Domestic 
Subsidiary Corporations'' and shall be prepared by the domestic 
liquidating corporation and shall be signed under penalties of perjury 
by an authorized officer of the domestic liquidating corporation and by 
an authorized officer of the foreign distributee corporation. The 
required statement shall contain a certification that states that if the 
foreign distributee corporation disposes of any stock subject to 
paragraph (b)(2)(iii)(A) of this section in a transaction described in 
paragraph (b)(2)(iii)(C) of this section, then the domestic liquidating 
corporation shall recognize all realized gain attributable to the 
distributed stock at the time of distribution, and the domestic 
liquidating corporation (or the foreign distributee corporation on 
behalf of the domestic liquidating corporation) shall file a U.S. income 
tax return (or amended U.S. income tax return, as the case may be) for 
the year of distribution reporting the gain attributable to such stock.
    (3) Other consequences--(i) Distributee basis in property. The 
foreign distributee corporation's basis in property subject to this 
paragraph (b) shall be the same as the domestic liquidating 
corporation's basis in such property immediately before the liquidation, 
increased by any gain, or reduced by any loss recognized by the domestic 
liquidating corporation on such property pursuant to paragraph (b)(1) of 
this section.
    (ii) Reporting under section 6038B. Section 6038B and the 
regulations thereunder apply to a domestic liquidating corporation's 
transfer of property to a foreign distributee corporation under section 
367(e)(2).
    (iii) Other rules. For other rules that may be applicable, see 
sections 1248, 897, and 381.
    (c) Distribution by a foreign corporation--(1) General rule--gain 
and loss not recognized. If a foreign corporation (foreign liquidating) 
makes a distribution of property in complete liquidation under section 
332 to a foreign corporation (foreign distributee) that meets the stock 
ownership requirements of section 332(b) with respect to stock in the 
foreign liquidating corporation, then, except as provided in paragraph 
(c)(2) of this section, section 337 (a) and (b)(1) shall apply and the 
foreign liquidating corporation shall not recognize gain (or loss) on 
the distribution under section 367(e)(2). If a foreign liquidating 
corporation distributes a partnership interest (whether foreign or 
domestic), then such corporation shall be treated as having distributed 
a proportionate share of partnership property

[[Page 331]]

in accordance with the principles of paragraph (b)(1)(iii) of this 
section.
    (2) Exceptions--(i) Property used in a U.S. trade or business--(A) 
General rule. A foreign liquidating corporation (including a corporation 
that has made an effective election under section 897(i)) that makes a 
distribution described in paragraph (c)(1) of this section shall 
recognize gain (or loss in accordance with principles contained in 
paragraph (b)(1)(ii) of this section) on the distribution of qualified 
property, as described in paragraph (b)(2)(i)(B) of this section (other 
than U.S. real property interests), that is used by the foreign 
liquidating corporation in the conduct of a trade or business within the 
United States at the time of distribution.
    (B) Ten-year active U.S. business exception. A foreign liquidating 
corporation shall not recognize gain under paragraph (c)(2)(i)(A) of 
this section, if--
    (1) The foreign distributee corporation, immediately thereafter and 
for the ten-year period beginning on the date of the distribution of 
such property, uses the property in the conduct of a trade or business 
in the United States;
    (2) The foreign distributee corporation is not entitled to benefits 
under a comprehensive income tax treaty (this requirement shall apply 
only if the foreign liquidating corporation (or predecessor corporation) 
was not entitled to benefits under a comprehensive income tax treaty); 
and
    (3) The foreign liquidating corporation and foreign distributee 
corporation attach the statement described in paragraph (c)(2)(i)(C) of 
this section to their U.S. income tax returns for their taxable years 
that include the distribution.
    (C) Required statement. The statement required by paragraph 
(c)(2)(i)(B)(3) of this section shall be entitled ``Required Statement 
under Sec. 1.367(e)-2(c)(2)(i),'' shall be prepared by foreign 
liquidating corporation, shall be signed under penalties of perjury by 
an authorized officer of the foreign liquidating corporation and by an 
authorized officer of the foreign distributee corporation, and shall be 
identical to the statement described in paragraph (b)(2)(i)(C) of this 
section, except that ``Sec. 1.367(e)-2(c)(2)(i)(B)'' shall be 
substituted for references to ``Sec. 1.367(e)-2(b)(2)(i)'' and 
``foreign liquidating corporation'' shall be substituted for ``domestic 
liquidating corporation'' each time it appears. References in the rules 
of paragraph (b)(2)(i)(C) of this section to various rules in paragraph 
(b) of this section shall be applied as if such references were to this 
paragraph (c). However, the statement described in this paragraph 
(c)(2)(i)(C) shall be modified as follows:
    (1) The foreign distributee corporation shall not be required to 
waive its income tax treaty benefits as required by Sec. 1.367(e)-
2(b)(2)(i)(C)(4), unless--
    (i) The foreign liquidating corporation was required to waive its 
treaty benefits under paragraph (b)(2)(i)(C)(4) of this section in 
connection with the distribution of such property in a prior liquidation 
distribution subject to the provisions of this section; or (ii) The 
foreign distributee corporation is entitled benefits under a treaty to 
which the foreign liquidating corporation was not entitled.
    (2) If the foreign distributee is required to waive treaty benefits 
because of paragraph (c)(2)(i)(C)(1)(ii) of this section, then the 
foreign distributee shall only be required to waive benefits that were 
not available to the foreign liquidating corporation (or a predecessor 
corporation) prior to liquidation.
    (3) The property description described in paragraph (b)(2)(i)(C)(2) 
of this section shall include only the qualified U.S. trade or business 
property described in paragraph (c)(2)(i) of this section.
    (D) Operating rules. By the foreign liquidating corporation's 
claiming nonrecognition under paragraph (c)(2)(i)(B) of this section and 
filing a statement described in paragraph (c)(2)(i)(C) of this section, 
the foreign liquidating corporation and the foreign distributee 
corporation agree to be subject to the rules of paragraph (c)(2)(i) of 
this section, as well as the rules of paragraphs (b)(2)(i)(D) and (E) of 
this section. In applying the rules of paragraphs (b)(2)(i)(D) and (E) 
of this section, ``foreign liquidating corporation'' shall be used 
instead of ``domestic liquidating

[[Page 332]]

corporation'' each time it appears. References in the rules of 
paragraphs (b)(2)(i)(D) and (E) of this section to various rules in 
paragraph (b) of this section shall be applied as if such references 
were to this paragraph (c).
    (ii) Property formerly used in a United States trade or business. A 
foreign liquidating corporation that makes a distribution described in 
paragraph (c)(1) of this section shall recognize gain (but not loss) on 
the distribution of property (other than U.S. real property interests) 
that had ceased to be used by the foreign liquidating corporation in the 
conduct of a U.S. trade or business within the ten-year period ending on 
the date of distribution and that would have been subject to section 
864(c)(7) had it been disposed. Section 864(c)(7) shall govern the 
treatment of any gain recognized on the distribution of assets described 
in this paragraph as income effectively connected with the conduct of a 
trade or business within the United States.
    (3) Other consequences--(i) Distributee basis in property. The 
foreign distributee corporation's basis in property subject to this 
paragraph (c) shall be the same as the foreign liquidating corporation's 
basis in such property immediately before the liquidation, increased by 
any gain, or reduced by any loss recognized by the foreign liquidating 
corporation on such property, pursuant to paragraph (c)(2) of this 
section.
    (ii) Other rules. For other rules that may apply, see sections 
367(b) and 381.
    (d) Anti-abuse rule. The Commissioner may require a domestic 
liquidating corporation to recognize gain on a distribution in 
liquidation described in paragraph (b) of this section (or treat the 
liquidating corporation as if it had recognized loss on a distribution 
in liquidation), if a principal purpose of the liquidation is the 
avoidance of U.S. tax (including, but not limited to, the distribution 
of a liquidating corporation's earnings and profits with a principal 
purpose of avoiding U.S. tax). A liquidation may have a principal 
purpose of tax avoidance even though the tax avoidance purpose is 
outweighed by other purposes when taken together.
    (e) Effective date. This section shall be applicable to 
distributions occurring on or after September 7, 1999 or, if taxpayer so 
elects, to distributions in taxable years ending after August 8, 1999.

[T.D. 8834, 64 FR 43077, Aug. 9, 1999; 65 FR 11467, Mar. 3, 2000; as 
amended by T.D. 9066, 68 FR 39452, July 2, 2003]

                        special rule; definitions