Td 9759

HIGHLIGHTS
OF THIS ISSUE

Bulletin No. 2016 –15
April 11, 2016

These synopses are intended only as aids to the reader in
identifying the subject matter covered. They may not be
relied upon as authoritative interpretations.

INCOME TAX
Rev. Rul. 2016 –10, page 545.
Fringe benefits aircraft valuation formula. For purposes of
section 1.61–21(g) of the Income Tax Regulations, relating to
the rule for valuing non-commercial flights on employerprovided aircraft, the Standard Industry Fare Level (SIFL) centsper-mile rates and terminal charge in effect for the first half of
2016 are set forth.

assets transferred in an outbound reorganization before the
indirect stock transfer rules. The modifications finalize changes
to the exceptions to the coordination rule by providing that –
under certain conditions – section 367(a) and (d) will not apply
to the transferred assets to the extent those assets are retransferred to a domestic corporation. Second, these regulations finalize rules governing transfers of stock or securities by
a domestic corporation to a foreign corporation in a section
361 exchange. Finally, these regulations finalize modifications
to the procedures for obtaining relief for failures to satisfy
certain reporting requirements.

Notice 2016 –27, page 576.
This notice provides that statements required under section
6035, regarding the basis of property distributed from the
estate of a decedent, need not be filed or furnished until June
30, 2016, rather than the current March 31, 2016 deadline.

ESTATE TAX
Notice 2016 –27, page 576.

Notice 2016 –28, page 576.
Notice 2016 –28 explains how a State or local government
amends the nomination of an empowerment zone to provide
for a new termination date of December 31, 2016.

This notice provides that statements required under section
6035, regarding the basis of property distributed from the
estate of a decedent, need not be filed or furnished until June
30, 2016, rather than the current March 31, 2016 deadline.

T.D. 9759, page 545.
These regulations apply when a corporation that is subject to
U.S. income tax acquires loss property tax-free from a liquidating subsidiary, from shareholders or others in a capital contribution, or from another corporation or person in a reorganization, and the loss in the acquired property accrued outside the
U.S. tax system. The regulations provide guidance for preventing the importation of loss in such cases by requiring the bases
of the assets received to be equal to value.

ADMINISTRATIVE

T.D. 9760, page 564.

Notice 2016 –27, page 576.

These regulations finalize without substantive change temporary and proposed regulations promulgated in 2013 that address outbound transfers of stock or securities in certain
nonrecognition transactions. First, the regulations finalize modifications to the indirect stock transfer coordination rule, which
generally provides that section 367(a) and (d) apply to any

This notice provides that statements required under section
6035, regarding the basis of property distributed from the
estate of a decedent, need not be filed or furnished until June
30, 2016, rather than the current March 31, 2016 deadline.

Finding Lists begin on page ii.

Rev. Proc. 2016 –22, page 577.
This revenue procedure updates Rev. Proc. 87.24, 1987–1
C.B. 720, which describes the practices for the administrative
appeals process in cases docketed in the United States Tax
Court.

The IRS Mission
Provide America’s taxpayers top-quality service by helping
them understand and meet their tax responsibilities and enforce the law with integrity and fairness to all.

Introduction
The Internal Revenue Bulletin is the authoritative instrument of
the Commissioner of Internal Revenue for announcing official
rulings and procedures of the Internal Revenue Service and for
publishing Treasury Decisions, Executive Orders, Tax Conventions, legislation, court decisions, and other items of general
interest. It is published weekly.
It is the policy of the Service to publish in the Bulletin all
substantive rulings necessary to promote a uniform application
of the tax laws, including all rulings that supersede, revoke,
modify, or amend any of those previously published in the
Bulletin. All published rulings apply retroactively unless otherwise indicated. Procedures relating solely to matters of internal
management are not published; however, statements of internal practices and procedures that affect the rights and duties
of taxpayers are published.
Revenue rulings represent the conclusions of the Service on
the application of the law to the pivotal facts stated in the
revenue ruling. In those based on positions taken in rulings to
taxpayers or technical advice to Service field offices, identifying details and information of a confidential nature are deleted
to prevent unwarranted invasions of privacy and to comply with
statutory requirements.
Rulings and procedures reported in the Bulletin do not have the
force and effect of Treasury Department Regulations, but they
may be used as precedents. Unpublished rulings will not be
relied on, used, or cited as precedents by Service personnel in
the disposition of other cases. In applying published rulings and
procedures, the effect of subsequent legislation, regulations,
court decisions, rulings, and procedures must be considered,
and Service personnel and others concerned are cautioned

against reaching the same conclusions in other cases unless
the facts and circumstances are substantially the same.
The Bulletin is divided into four parts as follows:
Part I.—1986 Code.
This part includes rulings and decisions based on provisions of
the Internal Revenue Code of 1986.
Part II.—Treaties and Tax Legislation.
This part is divided into two subparts as follows: Subpart A, Tax
Conventions and Other Related Items, and Subpart B, Legislation and Related Committee Reports.
Part III.—Administrative, Procedural, and Miscellaneous.
To the extent practicable, pertinent cross references to these
subjects are contained in the other Parts and Subparts. Also
included in this part are Bank Secrecy Act Administrative Rulings. Bank Secrecy Act Administrative Rulings are issued by
the Department of the Treasury’s Office of the Assistant Secretary (Enforcement).
Part IV.—Items of General Interest.
This part includes notices of proposed rulemakings, disbarment and suspension lists, and announcements.
The last Bulletin for each month includes a cumulative index for
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monthly indexes are cumulated on a semiannual basis, and are
published in the last Bulletin of each semiannual period.

The contents of this publication are not copyrighted and may be reprinted freely. A citation of the Internal Revenue Bulletin as the source would be appropriate.

April 11, 2016

Bulletin No. 2016 –15

Part I. Rulings and Decisions Under the Internal Revenue Code
of 1986
Section 61. Gross Income
Defined
26 CFR 1.61–21: Taxation of fringe benefits.

Rev. Rul. 2016 –10
For purposes of the taxation of fringe
benefits under section 61 of the Internal
Revenue Code, section 1.61–21(g) of the

Income Tax Regulations provides a
rule for valuing noncommercial flights on
employer-provided aircraft. Section 1.61–
21(g)(5) provides an aircraft valuation
formula to determine the value of such
flights. The value of a flight is determined
under the base aircraft valuation formula
(also known as the Standard Industry Fare
Level formula or SIFL) by multiplying the
SIFL cents-per-mile rates applicable for

Period During Which the Flight Is Taken
1/1/16 – 6/30/16

DRAFTING INFORMATION
The principal author of this revenue
ruling is Kathleen Edmondson of the Office of Associate Chief Counsel (Tax Exempt/Government Entities). For further
information regarding this revenue ruling,
contact Ms. Edmondson at (202) 317-6798
(not a toll-free number).
26 CFR 1.334 –1: Basis of property received in liquidations; 26 CFR 1.362–3: Basis of importation
property acquired in a loss importation transaction

T.D. 9759
DEPARTMENT OF THE
TREASURY
Internal Revenue Service
26 CFR Part 1
Limitations on the Importation
of Net Built-In Losses
AGENCY: Internal Revenue Service (IRS),
Treasury.
ACTION: Final Regulations
SUMMARY: This document contains final
regulations under sections 334(b)(1)(B) and
362(e)(1) of the Internal Revenue Code of
1986 (Code). The regulations apply to certain nonrecognition transfers of loss property to corporations that are subject to cer-

Bulletin No. 2016 –15

Terminal Charge
$39.19

tain taxes under the Code. The regulations
affect the corporations receiving such loss
property. This document also amends final
regulations under sections 332 and 351 to
reflect certain statutory changes. The regulations affect certain corporations that transfer assets to, or receive assets from, their
shareholders in exchange for the corporation’s stock.
DATES: Effective Date: These final regulations are effective on March 28, 2016.
FOR FURTHER INFORMATION
CONTACT: John P. Stemwedel (202)
317-5363 or Theresa A. Abell (202) 3177700 (not toll free numbers).
SUPPLEMENTARY INFORMATION:
Paperwork Reduction Act
The collection of information contained in these final regulations revises a
collection of information that has been
reviewed and approved by the Office of
Management and Budget in accordance
with the Paperwork Reduction Act of
1995 (44 U.S.C. 3507(d)) under control
number 1545-2019. The revised collection of information in these final regulations is in §§ 1.332– 6, 1.351–3, and
1.368 –3. By requiring that taxpayers separately report the fair market value and
basis of property (including stock) described in section 362(e)(1)(B) and in

545

the period during which the flight was
taken by the appropriate aircraft multiple
provided in section 1.61–21(g)(7) and
then adding the applicable terminal
charge. The SIFL cents-per-mile rates in
the formula and the terminal charge are
calculated by the Department of Transportation and are reviewed semi-annually.
The following chart sets forth the terminal charge and SIFL mileage rates:
SIFL Mileage Rates
Up to 500 miles ⫽ $.2144 per mile
501–1500 miles ⫽ $.1635 per mile
Over 1500 miles ⫽ $.1572 per mile

362(e)(2)(A) that is transferred in a taxfree transaction, this revised collection of
information aids in identifying transactions within the scope of sections
334(b)(1)(B), 362(e)(1), and 362(e)(2)
and thereby facilitates the ability of the
IRS to verify that taxpayers are complying
with sections 334(b)(1)(B), 362(e)(1), and
362(e)(2). The respondents will be corporations and their shareholders.
An agency may not conduct or sponsor, and a person is not required to respond to, a collection of information unless the collection of information displays
a valid control number.
Books or records relating to a collection of information must be retained as
long as their contents may become material in the administration of any internal
revenue law. Generally, tax returns and
tax return information are confidential, as
required by section 6103.
Background
Sections 334(b)(1)(B) and 362(e)(1)
(the anti-loss importation provisions)
were added to the Code by the American
Jobs Creation Act of 2004 (Pub. L.
108 –357, 188 Stat. 1418) to prevent erosion of the corporate tax base when a
person (Transferor) transfers property to a
corporation (Acquiring) and the result
would be an importation of loss into the
federal tax system. Proposed regulations

April 11, 2016

under sections 334(b)(1)(B) and 362(e)(1)
were published in the Federal Register
(78 FR 54971) on September 9, 2013 (the
2013 NPRM). Three written comments
were submitted on the 2013 NPRM; no
public hearing was requested or held. Additionally, on March 10, 2005, the Treasury Department and the IRS published in
the Federal Register (70 FR 11903– 01) a
notice of proposed rulemaking (the 2005
NPRM) that, among other things, proposed amendments to the regulations under sections 332 and 351 to reflect statutory changes. No comments were received
with respect to the amendments reflecting
statutory changes to section 332 and 351,
although several comments were received
with respect to other aspects of the 2005
NPRM. The 2005 NPRM’s proposed
amendments that reflect statutory changes
are included in this final rule.
The comments with respect to the 2013
NPRM, and the respective responses of
the Treasury Department and the IRS, are
described in the Summary of Comments
and Explanation of Provisions that follows the Summary of the 2013 NPRM.
Summary of the 2013 NPRM
1. General Application of Sections and
Interaction with Other Law
The 2013 NPRM provided specific
rules to implement the statutory framework of the anti-loss importation provisions, such as rules for identifying “importation property” and for determining
whether the transfer of that property occurs in a transaction subject to the antiloss importation provisions (designated a
“loss importation transaction” under the
2013 NPRM and these final regulations).
a. Importation property
The 2013 NPRM used a hypothetical
sale analysis to identify importation property. Under this approach, the actual tax
treatment of any gain or loss that would be
recognized on a sale of an individual
property, first by the Transferor immediately before the transfer and then by Acquiring immediately after the transfer, determined whether that individual property
was importation property. If a Transferor’s gain or loss on a sale of an individual
property immediately before the transfer

April 11, 2016

would not be subject to any tax imposed
under subtitle A of the Code (federal income tax), the first condition for classification as importation property would be
satisfied. If Acquiring’s gain or loss on a
sale of the transferred property immediately after the transfer would be subject to
federal income tax, the second condition
for classification as importation property
would be satisfied. If both of these conditions would be satisfied, the property
would be importation property.
In general, this determination was
made by reference to the tax treatment of
the Transferor(s) or Acquiring as hypothetical sellers of the transferred or acquired property, that is, whether the hypothetical seller would take the gain or loss
into account in determining its federal income tax liability. This determination had
to take into account all relevant facts and
circumstances. The 2013 NPRM included
a number of examples illustrating this approach. Thus, in one example, a taxexempt entity transferred property to a
taxable domestic corporation, and the determination took into account whether the
transferor, though generally tax-exempt,
would nevertheless be required to include
the amount of the gain or loss in unrelated
business taxable income (UBTI) under
sections 511 through 514 of the Code. In
other examples, a foreign corporation
transferred property to a taxable domestic
corporation and the determination took
into account whether the foreign corporation would be required to include the
amount of gain or loss under section 864
or 897 as income effectively connected
with, or treated as effectively connected
with, the conduct of a U.S. trade or business. Although the examples assumed that
there was no applicable income tax treaty,
in the case of an applicable income tax
treaty, the determination of whether property is importation property would take
into account whether the Transferor
would be taxable under the business profits article or gains article of the income tax
treaty.
i. Property Acquired from Grantor
Trusts, Partnerships, and S Corporations
Although the general rule in the 2013
NPRM looked solely to the tax treatment
of the Transferor(s) and Acquiring as hy-

546

pothetical sellers, a look-through rule applied if a Transferor was a grantor trust, a
partnership, or a small business corporation that elected under section 1362(a) to
be an S corporation. In these cases, the
determination of whether gain or loss
from a hypothetical sale was subject to
federal income tax was made by reference
to the tax treatment of the gain or loss in
the hands of the grantors, the partners, or
the S corporation shareholders.
If an organizing instrument allocated
gain or loss in different amounts, including by reason of a special allocation under
a partnership agreement, the determination of whether gain or loss from a hypothetical sale by the entity was subject to
federal income tax would be made by
reference to the person to whom, under
the terms of the instrument, the gain or
loss on the entity’s hypothetical sale
would actually be allocated, taking into
account the entity’s net gain or loss actually recognized in the tax period in which
the transaction occurred.
ii. Anti-Avoidance Rule for Certain
Entities
In certain circumstances, the Code permits an entity that would otherwise be
subject to federal income tax to shift the
incidence of federal income taxation to
the entity’s owners. For example, under
sections 651 and 652, and sections 661
and 662, distributions made by a trust are
deducted from the trust’s income for federal income tax purposes and included in
the beneficiary’s (or beneficiaries’) gross
income. Certain domestic corporations,
including regulated investment companies
(RICs, as defined in section 851(a)), real
estate investment trusts (REITs, as defined
in section 856(a)), and domestic corporations taxable as cooperatives (Cooperatives; see section 1381) are also able to
shift the incidence of federal income taxation by distributing income or gain.
The Treasury Department and the IRS
were concerned that disregarding the ability of these entities to shift the incidence
of federal income taxation could undermine the anti-loss importation provisions.
However, the Treasury Department and
the IRS were also concerned that applying
a look-through rule in all of these cases

Bulletin No. 2016 –15

would impose a significant administrative
burden.
Accordingly, the 2013 NPRM included
an anti-avoidance rule that applied to domestic trusts, estates, RICs, REITs, and
Cooperatives that directly or indirectly
transferred property (including through
other such entities) in a transaction described in section 362(a) or 362(b) (a Section 362 Transaction). The rule applied if
the property had been directly or indirectly transferred to or acquired by the
entity as part of a plan to avoid the application of the anti-loss importation provisions. When the look-through rule applied, the entity was presumed to
distribute the proceeds of its hypothetical
sale and the tax treatment of the gain or
loss in the distributees’ hands would determine whether the gain or loss was taken
into account in determining a federal income tax liability. If the distributee were
also such an entity, the principles of this
rule applied to look to the ultimate owners
of the interests in the entity.
iii. Gain or Loss Affecting Certain
Income Inclusions
Prior to the publication of the 2013
NPRM, questions were raised regarding
the treatment of property transferred by or
to a controlled foreign corporation (CFC),
as defined in section 957 (taking into account section 953(c)). The general rules of
the 2013 NPRM would not treat gain or
loss recognized on a hypothetical sale by a
CFC as subject to federal income tax;
however, because practitioners raised concerns prior to the publication of the 2013
NPRM, the 2013 NPRM expressly provided that gain or loss recognized on a
hypothetical sale by a CFC is not considered subject to federal income tax solely
by reason of an income inclusion under
section 951(a). The 2013 NPRM similarly
provided that gain or loss recognized by a
passive foreign investment company, as
defined in section 1297(a), was not subject
to federal income tax solely by reason of
an inclusion under section 1293(a).
iv. Gain or Loss Taxed to More than
One Person
If gain or loss realized on a hypothetical sale would be includible in income by

Bulletin No. 2016 –15

more than one person, the 2013 NPRM
treated such property, solely for purposes
of the anti-loss importation provisions, as
tentatively divided into separate portions
in proportion to the allocation of gain or
loss from a hypothetical sale to each
person. Tentatively divided portions
were treated and analyzed in the same
manner as any other property for purposes of applying the anti-loss importation provisions.
b. Loss importation transaction
Under the 2013 NPRM, once property
had been identified as importation property, Acquiring would determine its basis
in the importation property under generally applicable rules (disregarding sections 362(e)(1) and 362(e)(2)) and, if that
aggregate basis exceeded the aggregate
value of all importation property transferred in the Section 362 Transaction, the
transaction was a loss importation transaction subject to the anti-loss importation
provisions. If the aggregate basis of the
importation property did not exceed such
property’s value, the anti-loss importation
provisions had no further application.
i. Aggregate, Not Transferor-byTransferor, Approach
By their terms, section 362(e)(1) and
the provisions of the 2013 NPRM apply in
the aggregate to all importation property
acquired in a transaction, regardless of the
number of transferors in the transaction.
This rule differs from the transferor-bytransferor approach of section 362(e)(2),
which is concerned with whether a transferor would otherwise duplicate loss by
retaining loss in stock and transferring
property with a net built-in loss.
ii. Valuing Partnership Interests
In response to concerns raised by practitioners prior to the publication of the
2013 NPRM, a special valuation rule for
transfers of partnership interests was included in the 2013 NPRM. Under that
rule, the value of a partnership interest
would be determined in a manner that
takes partnership liabilities into account.
Specifically, the 2013 NPRM provided
that the value of a partnership interest

547

would be the sum of cash that Acquiring
would receive for such interest, increased
by any § 1.752–1 liabilities (as defined in
§ 1.752–1(a)(4)) of the partnership that
were allocated to Acquiring with regard to
such transferred interest under section
752. The 2013 NPRM included an example that illustrated the application and effect of this rule. The 2013 NPRM also
clarified that any section 743(b) adjustment to be made as a result of the transaction was made after any section 362(e)
basis adjustment.
c. Acquiring’s basis in acquired
property
If a transaction was a loss importation
transaction under the 2013 NPRM, Acquiring’s basis in each importation property received (including the tentatively divided portions of property determined to
be importation property) was an amount
equal to the value of that property, notwithstanding the general rules in sections
334(b)(1)(B), 362(a), and 362(b). This
rule applied to all importation property,
regardless of whether the property’s value
was more or less than its basis prior to the
loss importation transaction.
Immediately following the application
of the anti-loss importation provisions
(and prior to any application of section
362(e)(2)), any property that was treated
as tentatively divided for purposes of applying the anti-loss importation provisions
ceased to be treated as divided and was
treated as one undivided property (reconstituted property) with a basis equal to
the sum of the bases of the portions determined under the anti-loss importation provision, and the bases of all other portions
determined under generally applicable provisions (other than section 362(e)(2)).
If the transaction was described in section 362(a), the transferred property was
then aggregated on a transferor-bytransferor basis to determine whether further adjustment would be required to the
bases of loss properties under section
362(e)(2). The 2013 NPRM included a
cross-reference to section 362(e)(2) as
well as examples illustrating the application of both section 362(e)(1) and (e)(2) to
situations involving multiple transferors
and multiple properties that were not all
importation properties.

April 11, 2016

2. Filing Requirements
To facilitate the administration of both
the anti-loss importation provisions and
the anti-duplication provisions in section
362(e)(2), the 2013 NPRM modified the
reporting requirements applicable in all
affected transactions (section 332 liquidations and transactions described in
section 362(a) or section 362(b)) to require taxpayers to identify the bases and
values of properties subject to those
sections.
3. Modifications to Liquidation
Regulations
The 2013 NPRM also included several modifications to the regulations applicable to corporate liquidations. These
modifications were not substantive
changes to the law; they were solely to
update the regulations to reflect certain
statutory changes, including the repeal
of the General Utilities doctrine (reflected in the modification of sections
334(a) and 337(a), and the repeal of
sections 333 and 334(c)), the removal of
former section 334(b)(2) (replaced by
section 338), and the relocation of former section 332(c) (subsidiary indebtedness) to current section 337(b). In response to certain regulatory changes, the
2013 NPRM also added several crossreferences to regulations under section
367 and 897 to highlight the treatment
of certain transfers between foreign corporations.
Summary of Comments and
Explanation of Provisions
In general, the commenters agreed with
the general framework prescribed in the
2013 NPRM and the positions taken
therein by the Treasury Department and
the IRS. Accordingly, the final regulations
generally adopt the provisions of the 2013
NPRM. However, the final regulations
also adopt certain modifications and include certain clarifications in response to
comments. These comments, and the respective responses of the Treasury Department and the IRS, are described in the
following paragraphs.

April 11, 2016

1. Comments Related to Partnership
Matters
The majority of comments received in
response to the 2013 NPRM related to
issues involving partnerships.
a. Items taken into account to determine
treatment of hypothetical sale
As described previously, under the 2013
NPRM, the determination of whether gain
or loss on property transferred by a partnership is subject to federal income tax would
be made by reference to the treatment of the
partners, taking into account all partnership
items for the year of the Section 362 Transaction. One commenter suggested a closingof-the-books rule instead, asserting such an
approach would be more administrable for
transferor partnerships. The Treasury Department and the IRS are concerned that the
allocation of partnership items as of the date
of the transfer could differ from the allocation of such items at the end of the partnership tax year. In such a case, the partner to
whom gain or loss on the hypothetical sale
of the transferred property would be allocated as of the transfer date (using a hypothetical closing-of-the-books method) may
not be the partner to whom the allocation
would be made as of the end of the year,
taking all items for the year into account.
The Treasury Department and the IRS believe that the latter approach more accurately identifies the partner to whom the
gain or loss on a sale of the property would
be allocated, and thus more accurately determines whether such amounts would be
subject to federal income tax. Accordingly,
these final regulations do not permit using a
closing-of-the-books method.
In response to questions about how to
determine to which partner an item would
be allocated, and thus its federal income
tax treatment, the final regulations clarify
that the partnership agreement as well as
any applicable rules of law are taken into
account.
b. Widely-held partnerships and publicly
traded partnerships
Another commenter requested that
widely held partnerships (WHPs) and
publicly traded partnerships (PTPs) not be
subject to the look-through rule applicable
to all partnerships for determining

548

whether gain or loss on a hypothetical sale
is subject to federal income tax. Instead,
the commenter requested these entities be
afforded treatment similar to that of domestic estates, trusts, RICs, REITs, and
Cooperatives (and therefore be subject to
look-through treatment only in abusive
situations). The commenter’s reasons for
this suggested modification included that
look-through treatment would impose a
substantial administrative burden on
WHPs and PTPs and that these entities are
not generally vehicles for abuse. However, the statute explicitly contemplates
that partners, not partnerships, are the focus of the inquiry under section 362(e)(1).
WHPs and PTPs are already required to
apply a look-through approach to track
and report information to their partners.
For purposes of determining whether
there is an importation of loss for PTPs,
the Treasury Department and the IRS will
respect determinations derived by applying
generally accepted conventions in determining allocable income. See, for example, the
conventions set forth in § 1.706 – 4(c)(3)(ii).
Accordingly, the Treasury Department and
the IRS do not believe it is necessary or
appropriate to treat these partnerships as
other than partnerships, and the final regulations retain the approach used in the 2013
NPRM.
c. Interactions of sections 362(e) and
704(c)(1)(C)
Commenters also requested clarification of the interaction of the regulations
proposed under section 362(e)(1), the regulations under section 362(e)(2), and regulations proposed under section 704(c)(1)(C)
(79 FR 3041 (January 16, 2014)). The Treasury Department and the IRS agree that
such clarification would be appropriate.
However, the interaction of these provisions
cannot be addressed independently of the
promulgation of final regulations under section 704(c)(1)(C). Accordingly, these issues
will be addressed as part of the finalization
of regulations under that section.
d. Partnership allocations in the case of
a section 362(e)(2)(C) election
The 2013 NPRM, like the final regulations under section 362(e)(2), included examples involving partnership transferors

Bulletin No. 2016 –15

and allocation to partners of resulting adjustments under section 362(e)(1) and (2),
including adjustments in the case of a
section 362(e)(2)(C) election. The examples direct allocations to the partners that
contributed the property transferred by the
partnership in order to comply with the
legislative purpose of section 362(e)(1)
and (2) and to prevent distortions. Commenters agreed with the results provided
in the examples but requested a clarification of the authority on which the analyses
were based. The analysis reflected in the
examples is based on general aggregate and
entity principles of partnership tax law, taking into account the aggregate approach reflected in the statutory language of section
362(e)(1), and the purposes and principles
of section 362(e)(1) and (2). The rule applying an aggregate approach to partnerships is set forth in § 1.362–3(d)(2) and is
illustrated in Example 5 of § 1.362–3(f).
e. Rev. Rul. 84 –111 and Rev. Rul. 99 – 6
One commenter requested that the final
regulations clarify the effect of Rev. Rul.
84 –111 (1984 –30 IRB 6, 1984 –2 CB 88)
and Rev. Rul. 99 – 6 (1999 – 6 IRB 6,
1999 –1 CB 432) on a transfer of all the
interests in a partnership to a single
transferee in a loss importation transaction. The Treasury Department and the
IRS recognize that guidance would be
helpful in this area but have concluded
that resolution of the complex issues
implicated by those rulings is beyond
the scope of this project. Accordingly,
these final regulations do not address
this issue.
2. Comments Related to Other Special
Entities
a. Anti-avoidance rule
As previously described, the 2013
NPRM would only subject domestic estates, trusts, RICs, REITs, and Cooperatives to look-through treatment in certain
abusive situations. One comment suggested that the anti-avoidance rule would
be strengthened if the final regulations
provided certain operating presumptions
or factors to be applied in determining
whether the rule would apply. The Treasury Department and the IRS have con-

Bulletin No. 2016 –15

sidered this suggestion but determined
that the approach of the 2013 NPRM,
focusing on the existence of a plan to
avoid the anti-loss importation provisions,
is appropriate and administrable. Accordingly, the final regulations do not adopt
this suggestion.
b. Foreign non-grantor trusts
Another modification suggested by a
commenter would allow a foreign nongrantor trust to prove that its beneficiaries
were not foreign, in order to avoid treating
gain or loss from its hypothetical sale as
being treated as not subject to federal income tax. The Treasury Department and
the IRS considered the suggestion and determined that such an approach is inconsistent with the anti-loss importation provisions and the general approach of the
regulations because, subject to the antiabuse rule, all non-grantor trusts, not their
beneficiaries, are treated as transferors for
purposes of the anti-loss importation provisions. In addition, adopting the commenter’s suggestion would lead to inappropriate electivity with respect to the
application of the anti-loss importation
provisions because such an approach
would depend on the identity of the foreign non-grantor trust’s beneficiaries
rather than a determination of whether the
foreign non-grantor trust is subject to federal income tax. Accordingly, the final
regulations do not adopt this suggestion.
c. Trusts with no distributable net
income
Another commenter suggested that a
domestic trust should be excepted from
look-through treatment under the antiabuse rule if it has no distributable net
income within the meaning of section
643(a) in the taxable year of the transaction. The Treasury Department and the
IRS considered this suggestion and determined that it could lead to inappropriate
electivity and abuse because the existence
of distributable net income is not controlling in determining whether a transfer furthers a plan to avoid the anti-loss importation provisions. The existence of such a
plan is controlling for determining that the
transfer is subject to the anti-abuse rule.

549

Accordingly, the final regulations do not
adopt this suggestion.
d. Tax-exempt transferors of debtfinanced property
Under the 2013 NPRM, if a tax-exempt
entity transferred debt-financed property
(as defined in section 514), the disposition
of such property would be subject to federal income tax and thus the property
could not be importation property. This
rule applied even if there was only a de
minimis amount of indebtedness and so
only a small portion of any gain or loss
would be subject to federal income tax.
Commenters noted the cliff effect and resulting potential for avoidance of the antiloss importation provisions. The Treasury
Department and the IRS agree, and the
final regulations adopt an approach that
treats debt-financed property as subject to
federal income tax in proportion to the
amount of such gain or loss that would be
includible in the transferor’s UBTI on a
sale under sections 511–514. The final
regulations provide that portions of property determined under this rule are generally treated under the anti-loss importation
provisions in the same manner as portions
of property tentatively divided to reflect
multiple owners of gain or loss on the
property (for example, when a partnership
transfers property to Acquiring).
3. Interaction with Regulations Under
Section 367(b)
The proposed regulations requested
comments on the appropriate treatment of
transactions subject to section 367(b) and to
either section 334(b)(1)(B) or 362(e)(1).
Comments were also specifically requested
on what effect a basis reduction required
under section 334(b)(1)(B) or 362(e)(1)
should have on earnings and profits and any
inclusion required under § 1.367(b)–3. One
comment suggested that if an inbound liquidation or inter-group asset reorganization
gives rise to an inclusion of the all earnings
and profits amount under § 1.367(b)–3, the
basis reduction under section 334(b)(1)(B)
or 362(e)(1), respectively, should be reduced to allow the transferee corporation to
preserve an amount of built-in loss equal to
the all earnings and profits amount. The
comment suggested that this reduction is

April 11, 2016

appropriate because the inclusion of the all
earnings and profits amount is intended, in
part, as a toll charge for importing basis into
the U.S. tax system. However, the comment
acknowledged that if such a rule was adopted, anti-abuse rules would be needed to
address stuffing transactions and consideration should be given to adjusting the reduction for foreign tax credits associated
with the inclusion of the all earnings and
profits amount.
The Treasury Department and the IRS
have determined that the basis reduction
should not be affected by an inclusion of
the all earnings and profits amount. First,
there is no indication in section 334(b) or
362(e), or their legislative history, that the
basis reduction should be reduced or otherwise affected by an inclusion of the all
earnings and profits amount. Second, such
a reduction may be contrary to the policies
underlying these provisions. For example,
the built-in loss may have arisen before a
domestic corporation acquires all the
stock of a foreign corporation such that
the built-in loss bears no relation to the all
earnings and profits amount. Finally, determining the extent to which the built-in
loss relates to the all earnings and profits
amount would involve undue complexity.
Accordingly, the final regulations do not
adopt this suggestion. Furthermore, the
final regulations affirmatively state that
the basis reduction does not affect the
calculation of the all earnings and profits
amount.
4. Transferred Basis Transaction
Commenters requested clarification of
whether a transferee’s basis in property
continued to be considered determined by
reference to its transferor’s basis, notwithstanding the application of section
334(b)(1)(B) or section 362(e)(1). One
comment specifically related to the application of regulations under section 755;
other comments related to the treatment of
the transaction more generally, including
under sections 1223 (holding periods) and
7701(a)(4) (definition of transferred basis
transaction). The Treasury Department
and the IRS have concluded that the application of the anti-loss importation provisions to section 332 liquidations or Section 362 Transactions should not be
viewed as altering the fundamental nature

April 11, 2016

of the transactions to which section 334(b),
or section 362(a) or (b), apply. Similarly, the
Treasury Department and the IRS have concluded that the anti-duplication provisions
in section 362(e)(2) and § 1.362– 4 should
not be viewed as altering the fundamental
nature of the transactions to which they apply. Accordingly, the final regulations expressly provide that, notwithstanding the application of the anti-loss importation or antiduplication provisions to a transaction, the
transferee’s basis is generally considered
determined by reference to the transferor’s
basis for federal income tax purposes.
However, solely for purposes of determining the adjustment to the basis of partnership property under section 755 when a
partnership interest is transferred in a loss
importation transaction, the transferee’s
basis in the interest will be treated as not
determined by reference to the transferor’s basis. The reason for this exception
under section 755 is that the treatment
prescribed under § 1.755–1(b)(2) and (3)
(generally applicable to non-substituted
basis transactions and providing for basis
increases to built-in gain property and basis decreases to built-in loss property)
mirrors that prescribed under the anti-loss
importation provisions. Accordingly, in
order to align the adjustments to partnership property under § 1.755–1 with those
made under the anti-loss importation provisions, the final regulations provide that,
solely for purposes of applying section
755, a determination of basis under the
anti-loss importation provisions is treated
as not made by reference to the transferor’s basis.
5. Applicability of Other Provisions for
Determining Basis
A commenter noted that certain language in the 2013 NPRM could be read in
a way that was not intended. The 2013
NPRM states the general rule that Acquiring’s basis in importation property in a
loss importation transaction is equal to the
value of the property immediately after
the transaction, “[n]otwithstanding any
other provision of law[.]” The comment
indicated that this language could be read
to mean that, if the anti-loss importation
provisions applied to a transaction, the
transaction would not be subject to other
provisions of law, such as section 482,

550

that could further affect basis. Any such
implication was wholly unintended and
would be inappropriate. Accordingly, the
final regulations clarify that other provisions of law do in fact continue to apply.
6. Miscellaneous
Immediately following the publication
of the 2013 NPRM, a number of questions
were raised regarding cross-references to
the anti-loss importation and antiduplication provisions that were proposed
to be included in § 1.358 – 6 (basis in
triangular reorganizations). Those crossreferences were included solely to put taxpayers on notice that the anti-loss importation and anti-duplication provisions
could modify the application of the triangular basis regulations to a transaction
subject to those regulations. No substantive rule was intended or effected by the
proposed cross-references. However, to
clarify the purpose and scope of the crossreferences, the final regulations do not
include the individual cross-references included in the 2013 NPRM. Instead, the
final regulations combine these multiple
cross-references into one cross-reference
that is included in the general statement of
scope in § 1.358 – 6(a).
Commenters also noted a number of
nonsubstantive corrections and clarifications that have been adopted.
Finally, commenters suggested a number of issues that could be the subject of
further study, such as the effect of tax
treaties, nonfunctional currency, and the
application of section 7701(g) (clarification of fair market value in the case of
non-recourse indebtedness). These issues
are beyond the scope of this project and
are therefore not addressed in these final
regulations. The Treasury Department and
the IRS are considering whether further
study of those issues should be undertaken.
In addition, nonsubstantive changes to
conform nomenclature with that adopted
in these final regulations, as well as to
correct obvious errors and clarify crossreferences, are made to final regulations
under sections 362(e)(2), 705, and 1367
published under TD 9633.
Finally, these final regulations include
modifications to §§ 1.332–2 and 1.351–1
that reflect certain statutory changes under

Bulletin No. 2016 –15

sections 332 (relating to ownership of
subsidiary stock) and 351 (relating to
property permitted to be received by a
transferor without recognition of gain or
loss) proposed by the Treasury Department and the IRS in the 2005 NPRM (the
statutory modifications). As no comments
were received with respect to the statutory
modifications, the statutory modifications
are adopted as final regulations without
change.
Effective/Applicability Date
The final regulations under sections
334(b)(1)(B) and 362(e)(1) generally
adopt the proposed effective date and thus
are applicable to transactions occurring on
or after March 28, 2016, unless completed
pursuant to a binding agreement that was
in effect prior to March 28, 2016, and all
times afterwards. The final regulations also
apply to transactions occurring before March
28, 2016 resulting from entity classification
elections made under § 301.7701–3 that are
filed on or after March 28, 2016. In addition, the final regulations provide that taxpayers may apply these rules to any transaction occurring after October 22, 2004.
Special Analyses
Certain IRS regulations, including this
one, are exempt from the requirements of
Executive Order 12866, as supplemented
and reaffirmed by Executive Order 13563.
Therefore, a regulatory impact assessment
is not required. It has also been determined that section 553(b) of the Administrative Procedure Act (5 U.S.C. chapter
5) does not apply to these regulations.
Further, 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 the collection of
information requirement in these regulations modifies an existing collection of
information by requiring that certain information be reported separately instead
of in the aggregate. Although there should
be an actual decrease in reporting burden,
since taxpayers would no longer be required to aggregate the data they collect,
any change is expected to be minimal.
Accordingly, a Regulatory Flexibility
Analysis under the Regulatory Flexibility
Act (5 U.S.C. chapter 6) is not required.

Bulletin No. 2016 –15

Pursuant to section 7805(f) of the Code,
the proposed regulations preceding these
final regulations were submitted to the
Chief Counsel for Advocacy of the Small
Business Administration for comment on
their impact on small business, and no
comments were received.
Drafting Information
The principal author of these regulations is John P. Stemwedel of the Office of
Associate Chief Counsel (Corporate),
IRS. However, other personnel from the
Treasury Department and the IRS participated in their development.
*****
Adoption of Amendments to the Regulations
Accordingly, 26 CFR part 1 is amended
as follows:
PART 1—INCOME TAXES
Paragraph 1. The authority citation for
part 1 is amended by adding entries in
numerical order to read in part as follows:
Authority: 26 U.S.C. 7805 * * *
Section 1.334 –1 also issued under 26
U.S.C. 367(b).
*****
Section 1.362–3 also issued under 26
U.S.C. 367(b).
*****
Par. 2. Section 1.332–2 is amended by
revising the first sentence of paragraph (a)
and adding paragraph (f) to read as follows:

sentence at the end of paragraph (e) to
read as follows:
§ 1.332– 6 Records to be kept and
information to be filed with return.
(a) * * *
(3) The fair market value and basis of
assets of the liquidating corporation that
have been or will be transferred to any
recipient corporation, aggregated as follows:
(i) Importation property distributed in a
loss importation transaction, as defined in
§ 1.362–3(c)(2) and (3) (except that “section 332 liquidation” is substituted for
“section 362 transaction”), respectively;
(ii) Property with respect to which gain
or loss was recognized on the distribution;
(iii) Property not described in paragraph (a)(3)(i) or (ii) of this section;
*****
(e) Effective/applicability date. * * *
Paragraph (a)(3) of this section applies
with respect to liquidations under section
332 occurring on or after March 28, 2016,
and also with respect to liquidations under
section 332 occurring before such date as
a result of an entity classification election
under § 301.7701–3 of this chapter filed
on or after March 28, 2016, unless such
liquidation is pursuant to a binding agreement that was in effect prior to March 28,
2016 and at all times thereafter.
Par. 4. Section 1.332–7 is amended by
adding a sentence after the first sentence
of the paragraph to read as follows:
§ 1.332–7 Indebtedness of subsidiary to
parent.

§ 1.332–2 Requirements for
nonrecognition of gain or loss.
(a) The nonrecognition of gain or loss
under section 332 is limited to the receipt
of property by a corporation that is the
actual owner of stock (in the liquidating
corporation) meeting the requirements of
section 1504(a)(2). * * *
*****
(f) Applicability date. The first sentence of paragraph (a) of this section applies to plans of complete liquidation adopted after March 28, 1985, except as
specified in section 1804(e)(6)(B)(ii) and
(iii) of Pub. L. 99 –514.
Par. 3 Section 1.332– 6 is amended by
revising paragraph (a)(3) and adding a

551

* * * See section 337(b)(1). * * *
Par. 5. Section 1.334 –1 is revised to
read as follows:
§ 1.334 –1 Basis of property received in
liquidations.
(a) In general. Section 334 sets forth
rules for determining a distributee’s basis
in property received in a distribution in
complete liquidation of a corporation. The
general rule is set forth in section 334(a)
and provides that, if property is received
in a distribution in complete liquidation of
a corporation and if gain or loss is recognized on the receipt of the property, then
the distributee’s basis in the property is

April 11, 2016

the fair market value of the property at the
time of the distribution. However, if property is received in a complete liquidation
to which section 332 applies, including
property received in satisfaction of an indebtedness described in section 337(b)(1),
see section 334(b)(1) and paragraph (b) of
this section.
(b) Liquidations under section 332—
(1) General rule. Except as otherwise provided in paragraph (b)(2) or (3) of this section,
if a corporation (P) meeting the ownership
requirements of section 332(b)(1) receives
property from a subsidiary (S) in a complete liquidation to which section 332 applies (section 332 liquidation), including
property received in a transfer in satisfaction of indebtedness that satisfies the requirements of section 337(b)(1), P’s basis
in the property received is the same as S’s
basis in the property immediately before
the property was distributed. However,
see § 1.460 – 4(k)(3)(iv)(B)(2) for rules
relating to adjustments to the basis of certain contracts accounted for using a longterm contract method of accounting that
are acquired in a section 332 liquidation.
(2) Basis in property with respect to
which gain or loss was recognized. Except
as otherwise provided in Subtitle A of the
Internal Revenue Code (Code) and this
subchapter of the Income Tax Regulations, if S recognizes gain or loss on the
distribution of property to P in a section
332 liquidation, P’s basis in that property
is the fair market value of the property at
the time of the distribution. Section
334(b)(1)(A) (certain tax-exempt distributions under section 337(b)(2)); see also,
for example, § 1.367(e)–2(b)(3)(i).
(3) Basis in importation property received in loss importation transaction—
(i) Purpose. The purpose of section
334(b)(1)(B) and this paragraph (b)(3) is
to modify the application of this section to
prevent P from importing a net built-in
loss in a transaction described in section
332. See paragraph (b)(3)(iii)(A) of this
section for definitions of terms used in this
paragraph (b)(3).
(ii) Determination of basis. Notwithstanding paragraph (b)(1) of this section,
if a section 332 liquidation is a loss importation transaction, P’s basis in each
importation property received from S in
the liquidation is an amount that is equal
to the value of the property. The basis of

April 11, 2016

property received in a section 332 liquidation that is not importation property received in a loss importation transaction is
determined under generally applicable basis rules without regard to whether the
liquidation also involves the receipt of
importation property in a loss importation
transaction.
(iii) Operating rules—(A) In general.
For purposes of section 334(b)(1)(B) and
this paragraph (b)(3), the provisions of
§ 1.362–3 (basis of importation property
received in a loss importation transaction)
apply, adjusted as appropriate to apply to
section 332 liquidations. Thus, when used
in this paragraph (b)(3), the terms “importation property,” “loss importation transaction,” and “value” have the same meaning as in § 1.362–3(c)(2), (3), and (4),
respectively, except that “the section
332(b)(1) distributee corporation” is substituted for “Acquiring” and “section 332
liquidation” is substituted for “section 362
transaction.” Similarly, when gain or loss
on property would be owned or treated as
owned by multiple persons, the provisions of § 1.362–3(d)(2) apply to tentatively divide the property in applying
this section, substituting “section 332
liquidation” for “section 362 transaction” and making such other adjustments as necessary.
(B) Time for making determinations.
For purposes of section 334(b)(1)(B) and
this paragraph (b)(3)—
(1) P’s basis in distributed property.
P’s basis in each property S distributes to
P in the section 332 liquidation is determined immediately after S distributes
each such property;
(2) Value of distributed property. The
value of each property S distributes to P in
the section 332 liquidation is determined
immediately after S distributes the property;
(3) Importation property. The determination of whether each property distributed by S is importation property is made
as of the time S distributes each such
property;
(4) Loss importation transaction. The
determination of whether a section 332
liquidation is a loss importation transaction is made immediately after S makes
the final liquidating distribution to P.
(C) Effect of basis determination under
this paragraph (b)(3)—(1) Determination

552

by reference to transferor’s basis. A determination of basis under section
334(b)(1)(B) and this paragraph (b)(3) is a
determination by reference to the transferor’s basis, including for purposes of sections 1223(2) and 7701(a)(43). However,
solely for purposes of applying section
755, a determination of basis under this
paragraph (b)(3) is treated as a determination not by reference to the transferor’s
basis.
(2) Not tax-exempt income or noncapital, nondeductible expense. The application of this paragraph (b)(3) does not give
rise to an item treated as tax-exempt income under § 1.1502–32(b)(2)(ii) or as a
noncapital, nondeductible expense under
§ 1.1502–32(b)(2)(iii).
(3) No effect on earnings and profits.
Any determination of basis under this
paragraph (b)(3) does not reduce or otherwise affect the calculation of the all
earnings and profits amount provided in
§ 1.367(b)–2(d).
(iv) Examples. The examples in this
paragraph (b)(3)(iv) illustrate the application of section 334(b)(1)(B) and the provisions of this paragraph (b)(3). Unless
the facts indicate otherwise, the examples
use the following nomenclature and assumptions: USP is a domestic corporation
that has not elected to be an S corporation
within the meaning of section 1361(a)(1);
FC, CFC1, and CFC2 are controlled foreign corporations within the meaning of
section 957(a), which are not engaged in a
U.S. trade or business, have no U.S. real
property interests, and have no other relationships, activities, or interests that
would cause their property to be subject to
any tax imposed under subtitle A of the
Code (federal income tax); there is no
applicable income tax treaty; and all persons and transactions are unrelated. All
other relevant facts are set forth in the
examples:
Example 1. Basic application of this paragraph
(b)(3). (i) Distribution of importation property in a
loss importation transaction. (A) Facts. USP owns
the sole outstanding share of FC stock. FC owns
three assets, A1 (basis $40, value $50), A2 (basis
$120, value $30), and A3 (basis $140, value $20).
On Date 1, FC distributes A1, A2, and A3 to USP in
a complete liquidation that qualifies under section
332.
(B) Importation property. Under § 1.362–3(d)(2),
the fact that any gain or loss recognized by a CFC
may affect an income inclusion under section 951(a)
does not alone cause gain or loss recognized by the

Bulletin No. 2016 –15

CFC to be treated as taken into account in determining a federal income tax liability for purposes of this
section. Thus, if FC had sold either A1, A2, or A3
immediately before the transaction, no gain or loss
recognized on the sale would have been taken into
account in determining a federal income tax liability.
Further, if USP had sold A1, A2, or A3 immediately
after the transaction, USP would take into account
any gain or loss recognized on the sale in determining its federal income tax liability. Therefore, A1,
A2, and A3 are all importation properties. See paragraph (b)(3)(iii)(A) of this section and § 1.362–
3(c)(2).
(C) Loss importation transaction. Immediately
after the distribution, USP’s aggregate basis in the
importation properties, A1, A2, and A3, would, but
for section 334(b)(1)(B) and this section, be $300
($40 ⫹ $120 ⫹ $140) and the properties’ aggregate
value would be $100 ($50 ⫹ $30 ⫹ $20). Therefore,
the importation properties’ aggregate basis would
exceed their aggregate value and the distribution is a
loss importation transaction. See paragraph
(b)(3)(iii)(A) of this section and § 1.362–3(c)(3).
(D) Basis of importation property distributed in
loss importation transaction. Because the importation properties, A1, A2, and A3, were transferred in
a loss importation transaction, the basis in each of
the importation properties received is equal to its
value immediately after FC distributes the property.
Accordingly, USP’s basis in A1 is $50; USP’s basis
in A2 is $30; and USP’s basis in A3 is $20.
(ii) Distribution of both importation and nonimportation property in a loss importation transaction. (A) Facts. The facts are the same as in paragraph (i)(A) of this Example 1 except that FC is
engaged in a U.S. trade or business and A3 is used in
that U.S. trade or business.
(B) Importation property. A1 and A2 are importation properties for the reasons set forth in paragraph (i)(B) of this Example 1. However, if FC had
sold A3 immediately before the transaction, FC
would take into account any gain or loss recognized
on the sale in determining its federal income tax
liability. Therefore, A3 is not importation property.
See paragraph (b)(3)(iii)(A) of this section and
§ 1.362–3(c)(2).
(C) Loss importation transaction. Immediately
after the distribution, USP’s aggregate basis in the
importation properties, A1 and A2, would, but for
section 334(b)(1)(B) and this section, be $160 ($40
⫹ $120). Further, the properties’ aggregate value
would be $80 ($50 ⫹ $30). Therefore, the importation properties’ aggregate basis would exceed their
aggregate value and the distribution is a loss importation transaction. See paragraph (b)(3)(iii)(A) of
this section and § 1.362–3(c)(3).
(D) Basis of importation property distributed in
loss importation transaction. Because the importation properties, A1 and A2, were transferred in a loss
importation transaction, the basis in each of the
importation properties received is equal to its value
immediately after FC distributes the property. Accordingly, USP’s basis in A1 is $50 and USP’s basis
in A2 is $30.
(E) Basis of other property. Because A3 is not
importation property distributed in a loss importation
transaction, USP’s basis in A3 is determined under
generally applicable basis rules. Accordingly, USP’s

Bulletin No. 2016 –15

basis in A3 is $140, the adjusted basis that FC had in
the property immediately before the distribution. See
section 334(b)(1).
(iii) FC not wholly owned. The facts are the same
as in paragraph (i)(A) of this Example 1 except that
USP owns only 80% of the sole outstanding class of
FC stock and the remaining 20% is owned by individual X. Further, on Date 1 and pursuant to the plan
of liquidation, FC distributes A1 and A2 to USP and
A3 to X. A1 and A2 are importation properties, the
distribution to USP is a loss importation transaction,
and USP’s bases in A1 and A2 are equal to their
value ($50 and $30, respectively) for the reasons set
forth in paragraphs (ii)(C) and (D) of this Example 1.
Under section 334(a), X’s basis in A3 is $20.
(iv) Importation property, no net built in loss.
(A) Facts. The facts are the same as in paragraph
(i)(A) of this Example 1 except that the value of A2
is $230.
(B) Importation property. A1, A2, and A3, are
importation properties for the reasons set forth in
paragraph (i)(B) of this Example 1.
(C) Loss importation transaction. Immediately
after the distribution, USP’s aggregate basis in the
importation properties, A1, A2, and A3, would, but
for section 334(b)(1)(B) and this section, be $300
($40 ⫹ $120 ⫹ $140). However, the properties’
aggregate value would also be $300 ($50 ⫹ $230 ⫹
$20). Therefore, the importation properties’ aggregate basis would not exceed their aggregate value and
the distribution is not a loss importation transaction.
See paragraph (b)(3)(iii)(A) of this section and
§ 1.362–3(c)(3).
(D) Basis of importation property not distributed
in loss importation transaction. Because the importation properties, A1, A2, and A3, were not distributed in a loss importation transaction, the basis of
each of the importation properties is determined under the generally applicable basis rules. Accordingly,
immediately after the distribution, USP’s basis in A1
is $40, USP’s basis in A2 is $120, and USP’s basis
in A3 is $140, the adjusted bases that FC had in the
properties immediately before the distribution. See
section 334(b)(1).
(v) CFC stock as importation property distributed in loss importation transaction. (A) Facts. USP
owns the sole outstanding share of FC stock. FC
owns the sole outstanding share of CFC1 stock (basis $80, value $100) and the sole outstanding share
of CFC2 stock (basis $100, value $5). On Date 1, FC
distributes its shares of CFC1 and CFC2 stock to
USP in a complete liquidation that qualifies under
section 332.
(B) Importation property. No special rule applies
to the treatment of property that is the stock of a
CFC. Thus, if FC had sold either the CFC1 share or
the CFC2 share immediately before the transaction,
no gain or loss recognized on the sale would have
been taken into account in determining a federal
income tax liability. Further, if USP had sold either
the CFC1 share or the CFC2 share immediately after
the transaction, USP would take into account any
gain or loss recognized on the sale in determining its
federal income tax liability. Thus, the CFC1 share
and the CFC2 share are importation property. See
paragraph (b)(3)(iii)(A) of this section and
§ 1.362–3(c)(2).

553

(C) Loss importation transaction. Immediately
after the distribution, USP’s aggregate basis in importation property (the CFC1 share and the CFC2
share) would, but for section 334(b)(1)(B) and this
section, be $180 ($80 ⫹ $100) and the shares’ aggregate value is $105 ($100 ⫹ $5). Therefore, the
importation property’s aggregate basis would exceed
their aggregate value and the distribution is a loss
importation transaction. See paragraph (b)(3)(iii)(A)
of this section and § 1.362–3(c)(3).
(D) Basis of importation property distributed in
loss importation transaction. Because the importation property (the CFC1 share and the CFC2 share)
was transferred in a loss importation transaction,
USP’s basis in each of the shares received is equal to
its value immediately after FC distributes the shares.
Accordingly, USP’s basis in the CFC1 share is $100
and USP’s basis in the CFC2 share is $5.
Example 2. Multiple step liquidation. (i) Facts.
USP owns the sole outstanding share of FC stock.
On January 1 of year 1, FC adopts a plan of liquidation. FC makes the following distributions to USP
in a transaction that qualifies as a complete liquidation under section 332. In year 1, FC distributes A1
and, immediately before the distribution, FC’s basis
in A1 is $100 and A1’s value is $120. In Year 2, FC
distributes A2, and, immediately before the distribution, FC’s basis in A2 is $100 and A2’s value is
$120. In year 3, in its final liquidating distribution,
FC distributes A3 and, immediately before the distribution, FC’s basis in A3 is $100 and A3’s value is
$120. As of the time of the final distribution, USP
had depreciated the bases of A1 and A2 to $90 and
$95, respectively; the value of A1 had appreciated to
$160; and, the value of A2 has declined to $0.
(ii) Importation property. If FC had sold either
A1, A2, or A3 immediately before it was distributed,
no gain or loss recognized on the sale would have
been taken into account in determining a federal
income tax liability. Further, if USP had sold either
A1, A2, or A3 immediately after it was distributed,
USP would take into account any gain or loss recognized on the sale in determining its federal income
tax liability. Therefore, A1, A2, and A3 are all
importation properties. See paragraph (b)(3)(iii)(A)
of this section and § 1.362–3(c)(2).
(iii) Loss importation transaction. Immediately
after it was distributed, USP’s basis in each of the
importation properties, A1, A2, and A3, would, but
for section 334(b)(1)(B) and this section, have been
$100. Further, immediately after each such property
was distributed, its value was $120. Thus, the properties’ aggregate basis, $300, would not have exceeded the properties’ aggregate value, $360. Accordingly, the distribution is not a loss importation
transaction irrespective of the fact that, when the
liquidation was completed, the properties’ aggregate
basis was $285 and the properties’ aggregate value
was $280. See paragraph (b)(3)(iii)(B) of this section
and § 1.362–3(c)(3).
(iv) Basis of importation property not distributed
in loss importation transaction. Because the importation properties, A1, A2, and A3, were not distributed in a loss importation transaction, the basis of
each of the importation properties is determined under the generally applicable basis rules. Accordingly,
USP takes each of the properties with a basis of $100
and, immediately after the final distribution, has an

April 11, 2016

adjusted basis of $90 in A1 (USP’s $100 basis less
the $10 depreciation), $95 in A2 (USP’s $100 basis
less the $5 depreciation), and $100 in A3. See section 334(b).

(c) Applicability date. This section applies with respect to liquidations occurring on or after March 28, 2016, and also
with respect to liquidations occurring before such date as a result of an entity
classification election under § 301.7701–3
of this chapter filed on or after March 28,
2016, unless such liquidation is pursuant
to a binding agreement that was in effect
prior to March 28, 2016 and at all times
thereafter. In addition, taxpayers may apply this section to any section 332 liquidation occurring after October 22, 2004.
Par. 6. Section 1.337–1 is added to read
as follows:
§ 1.337–1 Nonrecognition for property
distributed to parent in complete
liquidation of subsidiary.
(a) General rule. If sections 332(a) and
337 are applicable with respect to the receipt of a subsidiary‘s property in complete liquidation, no gain or loss is recognized to the liquidating subsidiary with
respect to such property (including property distributed with respect to indebtedness, see section 337(b)(1) and § 1.332–7),
except as provided in section 337(b)(2)
(distributions to certain tax-exempt distributees), section 367(e)(2) (distributions to
foreign corporations), and section 897(d)
(distributions of U.S. real property interests by foreign corporations).
(b) Aplicability date. This section applies to any taxable year beginning on or
after March 28, 2016.
Par. 7. Section 1.351–1 is amended by:
1. Adding headings for paragraphs (a)
and (a)(1) and revising the first sentence
of paragraph (a)(1) introductory text.
2. Adding a sentence after the fifth
sentence in paragraph (a)(1) introductory
text and removing the phrase “For purposes of this section” at the end of paragraph (a)(1) introductory text and adding
in its place the phrase “In addition, for
purposes of this section”.
3. Revising paragraphs (a)(1)(i) and (ii).
4. Removing the undesignated paragraph immediately following paragraph
(a)(1)(ii).
5. Adding a heading for paragraph (a)(2).

April 11, 2016

6. Adding a heading for paragraph (b)
and revising paragraph (b)(1).
7. Adding a heading for paragraph
(b)(2).
8. Adding paragraph (d).
The additions and revisions read as follows:
§ 1.351–1 Transfer to corporation
controlled by transferor.
(a) In general—(1) Nonrecognition of
gain or loss. Section 351(a) provides, in
general, for the nonrecognition of gain or
loss upon the transfer by one or more
persons of property to a corporation solely
in exchange for stock of such corporation
if, immediately after the exchange, such
person or persons are in control of the
corporation to which the property was
transferred. * * * For purposes of this
section, stock rights and stock warrants
are not included in the term stock. * * *
(i) Stock will not be treated as issued
for property if it is issued for services
rendered or to be rendered to or for the
benefit of the issuing corporation; and
(ii) Stock will not be treated as issued
for property if it is issued for property
which is of relatively small value in comparison to the value of the stock already
owned (or to be received for services) by
the person who transferred such property
and the primary purpose of the transfer is
to qualify under this section the exchanges
of property by other persons transferring
property.
(2) Application. * * *
*****
(b) Multiple transferors—(1) Disproportionate transfers. When property is
transferred to a corporation by two or
more persons in exchange for stock, as
described in paragraph (a) of this section,
and the stock received is disproportionate
to the transferor’s prior interest in such
property, the entire transaction will be
given tax effect in accordance with its true
nature, and the transaction may be treated
as if the stock had first been received in
proportion and then some of such stock
had been used to make gifts (section 2501
and following), to pay compensation (sections 61(a)(1) and 83(a)), or to satisfy
obligations of the transferor of any kind.
(2) Application. * * *
*****

554

(d) Applicability date. Paragraphs
(a)(1) and (b)(1) of this section apply to
transfers after October 2, 1989, for tax
years ending after such date, except as
specified in section 7203(c)(2) and (3) of
Pub. L. 101–239.
Par. 8. Section 1.351–3 is amended by
revising paragraphs (a)(3) and (b)(3), and
adding a sentence at the end of paragraph
(f) to read as follows:
§ 1.351–3 Records to be kept and
information to be filed.
(a) * * *
(3) The fair market value and basis of
the property transferred by such transferor
in the exchange, determined immediately before the transfer and aggregated
as follows:
(i) Importation property transferred in
a loss importation transaction, as defined
in § 1.362–3(c)(2) and (3), respectively;
(ii) Loss duplication property as defined in § 1.362– 4(g)(1);
(iii) Property with respect to which any
gain or loss was recognized on the transfer
(without regard to whether such property
is also identified in paragraph (a)(3)(i) or
(ii) of this section); and
(iv) Property not described in paragraph (a)(3)(i), (ii), or (iii) of this section.
*****
(b) * * *
(3) The fair market value and basis of
property received in the exchange, determined immediately before the transfer and
aggregated as follows:
(i) Importation property transferred in
a loss importation transaction, as defined
in § 1.362–3(c)(2) and (3), respectively;
(ii) Loss duplication property as defined in § 1.362– 4(g)(1);
(iii) Property with respect to which any
gain or loss was recognized on the transfer
(without regard to whether such property
is also identified in paragraph (b)(3)(ii) of
this section);
(iv) Property not described in paragraph (b)(3)(i), (ii), or (iii) of this section;
and
*****
(f) Effective/applicability date. * * *
Paragraphs (a)(3) and (b)(3) of this section apply with respect to exchanges under section 351 occurring on or after
March 28, 2016, and also with respect to

Bulletin No. 2016 –15

exchanges under section 351 occurring
before such date as a result of an entity
classification election under § 301.7701–3
of this chapter filed on or after March 28,
2016, unless such exchange is pursuant to
a binding agreement that was in effect
prior to March 28, 2016 and at all times
thereafter.
Par. 9. Section 1.358 – 6 is amended by
adding a sentence at the end of paragraph
(a), revising paragraphs (c)(4) introductory text, (e), and the first sentence of
paragraph (f)(3), and adding paragraph
(f)(4) to read as follows:
§ 1.358 – 6 Stock basis in certain
triangular reorganizations.
(a) Scope. * * * See also sections
362(e)(1) and 362(e)(2) for further adjustments to basis that may be necessary under either or both of those sections.
*****
(c) * * *
(4) Examples. The rules of this paragraph (c) are illustrated by the following
examples. For purposes of these examples, P, S, and T are domestic corporations, the property transferred is not importation property within the meaning of
§ 1.362–3(c)(2) or loss duplication property
within the meaning of § 1.362– 4(g)(1), P
and S do not file consolidated returns, P
owns all of the shares of the only class of S
stock, the P stock exchanged in the transaction satisfies the requirements of the applicable triangular reorganization provisions,
and the facts set forth the only corporate
activity.
*****
(e) Cross-references—(1) Triangular
reorganizations involving members of a
consolidated group. For rules relating to
stock basis adjustments made as a result
of a triangular reorganization in which P
and S, or P and T, as applicable, are, or
become, members of a consolidated
group, see § 1.1502–30. However, if a
transaction is a group structure change,
stock basis adjustments are determined
under § 1.1502–31 and not under
§ 1.1502–30, even if the transaction also
qualifies as a reorganization otherwise
subject to § 1.1502–30.
(2) Triangular reorganizations involving certain foreign corporations. For rules
relating to stock basis adjustments made

Bulletin No. 2016 –15

as a result of triangular reorganizations
involving certain foreign corporations, see
§§ 1.367(b)– 4(b), 1.367(b)–10, and
1.367(b)–13.
(f) * * *
(3) Triangular G reorganization and
special rule for triangular reorganizations involving members of a consolidated
group. Paragraph (e)(1) of this section
shall apply to triangular reorganizations
occurring on or after September 17, 2008.
***
(4) Triangular reorganizations involving importation property acquired in loss
importation transaction or loss duplication transaction; triangular reorganizations involving certain foreign corporations. Paragraphs (a) and (e)(2) of this
section apply to triangular reorganizations
occurring after October 22, 2004 unless
effected to a binding agreement that was
in effect prior to that date and at all times
thereafter.
Par. 10. Section 1.362–3 is added to
read as follows:
§ 1.362–3 Basis of importation property
acquired in loss importation transaction.
(a) Purpose. The purpose of section
362(e)(1) and this section is to modify the
application of section 362(a) (section 351
transfers, contributions to capital, or
paid-in surplus) and section 362(b) (reorganizations) to prevent a corporation (Acquiring) from importing a net built-in loss
in a transaction described in either section.
See paragraph (c) of this section for definitions of terms used in this section.
(b) Basis determinations under this
section—(1) Basis of importation property received in loss importation transaction. Notwithstanding the general rules of
section 362(a) and (b), Acquiring’s basis
in importation property (as defined in
paragraph (c)(2) of this section) acquired
in a loss importation transaction (as defined in paragraph (c)(3) of this section) is
equal to the value of the property immediately after the transaction.
(2) Adjustment to basis of subsidiary
stock in triangular reorganizations. If a
corporation (P) computes its basis in stock
of a subsidiary (whether S or T) under
§ 1.358 – 6 (stock basis in certain triangular reorganizations), P’s basis in property
treated as acquired by P in § 1.358 – 6(c) is

555

determined under section 362(e)(1) and
this section to the extent such property, if
actually acquired by P, would be importation property acquired in a loss importation
transaction. See § 1.358 – 6(c)(1)(i)(A),
(c)(2)(ii)(B), and (c)(3)(i). The subsidiary’s
basis in the property actually acquired in the
transaction is determined under applicable
law (including this section), without regard
to the amount of any adjustment to P’s basis
in the subsidiary’s stock. Thus, the basis of
the property in S’s or T’s hands may differ
from the amount of the adjustment to P’s
basis in its stock of S or T.
(3) Acquiring’s basis in other property
transferred. In general, Acquiring’s basis
in property received in a section 362
transaction (as defined in paragraph (c)(1)
of this section) that is not determined under section 362(e)(1) and this section is
determined under section 362(a) or section 362(b). However, if the transaction is
described in section 362(a) (without regard to whether it is also described in any
other section), further adjustment may be
required under section 362(e)(2). See
§ 1.362– 4.
(4) Other effects of basis determination
under this section—(i) Determination by
reference to transferor’s basis. A determination of basis under this section is a
determination by reference to the transferor’s basis, including for purposes of sections 1223(2) and 7701(a)(43). However,
solely for purposes of applying section
755, a determination of basis under this
section is treated as a determination not by
reference to the transferor’s basis.
(ii) Not tax-exempt income or noncapital, nondeductible expense. The application of this section does not give rise to an
item treated as tax-exempt income under
§ 1.1502–32(b)(2)(ii) or as a noncapital,
nondeductible expense under § 1.1502–
32(b)(2)(iii).
(iii) No effect on earnings and profits.
Any determination of basis under this section does not reduce or otherwise affect the
calculation of the all earnings and profits
amount provided in § 1.367(b)–2(d).
(c) Definitions. For purposes of this
section, the following definitions apply:
(1) Section 362 transaction. The term
section 362 transaction means any transaction described in section 362(a) or in
section 362(b).

April 11, 2016

(2) Importation property—(i) General
rule. The term importation property
means any property (including separate
portions determined under paragraph
(d)(4) of this section and separate portions
of property tentatively divided under paragraph (e)(2) of this section) with respect
to which—
(A) Any gain or loss that would be
recognized on its sale by the transferor
immediately before the transaction (the
transferor’s hypothetical sale) would not
be subject to tax imposed under any provision of subtitle A of the Internal Revenue Code (federal income tax) (taking into
account the provisions of paragraph (d) of
this section); and
(B) Any gain or loss that would be
recognized on its sale by Acquiring immediately after the transaction (Acquiring’s hypothetical sale) would be subject
to federal income tax (taking into account
the provisions of paragraph (d) of this
section).
(ii) Special rules for applying this
paragraph (c)(2). See paragraph (d) of
this section for rules for determining
whether gain or loss on a hypothetical sale
would be taken into account in determining a federal income tax liability and paragraph (e) of this section for rules applicable when more than one person would
take such gain or loss into account.
(3) Loss importation transaction. The
term loss importation transaction means
any section 362 transaction in which Acquiring’s aggregate basis in all importation property received from all transferors
in the transaction would exceed the aggregate value of such property immediately
after the transaction. For this purpose, Acquiring’s basis in property received is determined without regard to this section or
section 362(e)(2).
(4) Value—(i) General rule. The term
value means fair market value.
(ii) Special rule for transfers of partnership interests. Notwithstanding the
general rule in paragraph (c)(4)(i) of this
section, when referring to a partnership
interest, for purposes of this section, the
term value means the sum of the cash that
Acquiring would receive for the interest,
assuming an exchange between a willing
buyer and a willing seller (neither being
under any compulsion to buy or sell and
both having reasonable knowledge of rel-

April 11, 2016

evant facts), increased by any § 1.752–1
liabilities (as defined in § 1.752–1(a)(4))
of the partnership allocated to Acquiring
with regard to such transferred interest
under section 752 immediately after the
transfer to Acquiring. If a partnership
has elected under section 754, or if section 743(b) would require a downward
basis adjustment to the partnership
property, the partnership must apply
the rules of § 1.743–1 to determine the
amount of the basis adjustment to the
partnership property.
(d) Rules for determining whether gain
or loss would be taken into account in
determining a federal income tax liability—(1) General rule. In general, any gain
or loss that would be recognized on a
hypothetical sale described in paragraph
(c)(2) of this section is considered to be
subject to federal income tax if, taking
into account all relevant facts and circumstances, such gain or loss would affect or
be taken into account in determining the
federal income tax liability of the transferor or Acquiring, respectively. This determination is made without regard to
whether such person has or would have
any actual federal income tax liability for
the taxable year of the transaction.
(2) Look-through rule in the case of
certain pass-through entities. Notwithstanding the general rule in paragraph
(d)(1) of this section, the determination of
whether any gain or loss on a hypothetical
sale would be treated as subject to federal
income tax is made by reference to the
person that would be required to include
such gain or loss in its taxable income if
the hypothetical seller is—
(i) A trust treated as owned by its
grantors or others (see section 671);
(ii) A partnership (see section 701); or
(iii) An S corporation (see sections
1363 and 1366).
(3) Controlled foreign corporation
(CFC), passive foreign investment company (PFIC). For purposes of this section,
gain or loss that would be recognized by a
CFC (as defined in section 957(a)) or a
PFIC (as defined in section 1297(a)) is not
deemed taken into account in determining
a federal income tax liability solely because it could affect an inclusion under
section 951(a) or section 1293(a).
(4) Special rule for debt-financed property subject to section 512. If property is

556

debt-financed property (as defined in section 514(b)) owned by an organization
subject to the unrelated business income
tax described in section 511(a)(2) and, as
a result, a portion of any gain or loss on a
sale of the property would be included in
unrelated taxable business income (UBTI)
under section 512, such property is treated
as divided into separate portions in proportion to the amount of such gain or loss
that would be includible in UBTI. The
rules of paragraph (e) of this section apply
to determine the characterization of such
portions (as includible in the determination of a federal income tax liability or
not), and the tax treatment and consequences of the transaction in which such
portions are transferred.
(5) Look-through treatment in the case
of certain avoidance transactions—(i)
Application of this paragraph (d)(5). This
paragraph (d)(5) applies if—
(A) The transferor is a domestic entity
that is a trust (other than a trust described
in paragraph (d)(2)(i) of this section), estate, regulated investment company (as
defined in section 851(a)), a real estate
investment trust (as defined in section
856(a)), or a cooperative (as described in
section 1381); and
(B) The transferor transfers, directly or
indirectly, property that was transferred to
or acquired by it as part of a plan (whether
of transferor, Acquiring, or any other person) to avoid the application of section
362(e)(1) and this section to a section 362
transaction.
(ii) Effect of application of this paragraph (d)(5). Notwithstanding paragraph
(d)(1) of this section, if a transferor is
described in both paragraphs (d)(5)(i)(A)
and (B) of this section—
(A) The transferor is treated as though
it distributes the proceeds of the hypothetical sale (which, for this purpose, are presumed to be an amount greater than zero);
(B) To the fullest extent possible under
the transferor’s organizing instrument, the
deemed distribution is treated as made to a
distributee or distributees that would not
take distributions from the transferor into
account in determining a federal income
tax liability; and
(C) The determination of whether the
gain or loss on the hypothetical sale is
treated as subject to federal income tax is

Bulletin No. 2016 –15

made by reference to the deemed distributee or distributees.
(iii) Tiered entities. If a deemed distributee is an entity described in paragraph
(d)(5)(i)(A) of this section, the determination of whether gain or loss on the hypothetical sale is taken into account in determining a federal income tax liability is
made by treating the deemed distributee,
and any successive such deemed distributees, as a transferor and applying the rules
in paragraphs (d)(5)(i) and (ii) of this section to its deemed distribution (and to all
successive deemed distributions), until no
deemed distributee or successive deemed
distributee is an entity described in paragraph (d)(5)(i)(A) of this section.
(e) Special rules for gain or loss that
would be taken into account by multiple
persons—(1) In general. If gain or loss
from a disposition of property would be
includible in income by more than one
person, the property is treated as tentatively divided into separate portions in
proportion to the amount of gain or loss
recognized with respect to the property
that would be allocated to each such person. If an entity’s organizing instrument
specially allocates gain and loss, the tentative division of property under this paragraph (e) must reflect the manner in which
gain or loss on the disposition of such
property would be allocated under the
terms of the organizing instrument and
any applicable rules of law, taking into
account the net gain or loss actually recognized by the entity in that tax year.
(2) Application of section. The rules of
this section apply independently to each
tentatively divided portion to determine if
the portion is importation property. Each
tentatively divided portion that is determined to be importation property is included with all other importation property
in the determination of whether the transaction is a loss importation transaction.
(3) Acquiring’s basis in property tentatively divided into separate portions.
Immediately after the application of section 362(e)(1) and this section and before
the application of section 362(e)(2), each
property treated as tentatively divided into
separate portions for purposes of applying
section 362(e)(1) and this section ceases
to be treated as tentatively divided and
Acquiring has a single, undivided basis in
such property that is equal to the sum of—

Bulletin No. 2016 –15

(i) The value of each tentatively divided portion that is importation property,
if the transaction is a loss importation
transaction; and
(ii) Acquiring’s basis in each tentatively divided portion that is not importation property received in a loss importation transaction, as determined under
section 362(a) or section 362(b), as applicable, and without regard to any potential
application of section 362(e)(2).
(f) Examples. The examples in this
paragraph (f) illustrate the application of
section 362(e)(1) and the provisions of
this section. Unless otherwise indicated,
the examples use the following nomenclature and assumptions: A and B are U.S.
citizens. DC, DC1, and P are domestic
corporations that have not elected to be S
corporations within the meaning of section 1361(a)(1) and that are not members
of a consolidated group. F is a foreign
individual. FP is a foreign partnership.
FC, FC1, and FC2 are foreign corporations. Unless the facts indicate otherwise,
the foreign individuals, corporations, and
partnerships are not engaged in a U.S.
trade or business, have no U.S. real property interests, and have no other relationships, activities, or interests that would
cause them, their shareholders, their partners, or their property to be subject to
federal income tax. There is no applicable
income tax treaty, all persons’ tax years
are calendar years, and all persons and
transactions are unrelated unless the facts
indicate otherwise.
Example 1. Basic application of section. (i) Section 351 transfer of importation property in a loss
importation transaction. (A) Facts. FC owns three
assets, A1 (basis $40, value $150), A2 (basis $120,
value $30), and A3 (basis $140, value $20). On Date
1, FC transfers A1, A2, and A3 to DC in a transaction to which section 351 applies.
(B) Importation property. If FC had sold A1, A2,
or A3 immediately before the transaction, no gain or
loss recognized on the sale would have been taken
into account in determining a federal income tax
liability. Further, if DC had sold A1, A2, or A3
immediately after the transaction, DC would take
into account any gain or loss recognized on the sale
in determining its federal income tax liability. Therefore, A1, A2, and A3 are all importation properties.
See paragraph (c)(2) of this section.
(C) Loss importation transaction. FC’s transfer
of A1, A2, and A3 is a section 362 transaction.
Furthermore, but for section 362(e)(1) and this section and section 362(e)(2), DC’s aggregate basis in
the importation properties, A1, A2, and A3, would
be $300 ($40 ⫹ $120 ⫹ $140) under section 362(a)
and the properties’ aggregate value would be $200

557

($150 ⫹ $30 ⫹ $20). Therefore, the importation
properties’ aggregate basis would exceed their aggregate value and the transaction is a loss importation transaction. See paragraph (c)(3) of this section.
(D) Application of section 362(e)(1) and this
section to importation property received in loss importation transaction. Because the importation properties, A1, A2, and A3, were transferred in a loss
importation transaction, paragraph (b)(1) of this section applies and DC’s basis in A1, A2, and A3 will
each be equal to the property’s value ($150, $30, and
$20, respectively) immediately after the transfer.
(E) Basis of property received in transaction.
Following the application of section 362(e)(1) and
this section, the provisions of section 362(e)(2) must
be taken into account because the transfer is a section 362(a) transaction. Taking into account the application of section 362(e)(1) and this section, DC’s
aggregate basis in the transferred properties would
not exceed their aggregate value immediately after
the transfer. Therefore, FC does not have a net
built-in loss, FC’s transfer is not a loss duplication
transaction, and section 362(e)(2) does not apply to
this transaction. DC’s bases in A1, A2, and A3, as
determined under paragraph (i)(D) of this Example
1, are $150, $30, and $20, respectively. Under section 358(a), FC receives the DC stock with a basis of
$300 (the sum of FC’s bases in A1, A2, and A3
immediately before the exchange).
(ii) Reorganization. The facts are the same as in
paragraph (i)(A) of this Example 1 except that, instead of transferring property to DC in a section 351
exchange, FC merges with and into DC in a transaction described in section 368(a)(1)(A). The analysis and results are the same as set forth in paragraphs
(i)(B), (C), and (D) of this Example 1. However, the
analysis in paragraph (i)(E) of this Example 1 does
not apply to these facts because the transaction is not
subject to 362(e)(2) and § 1.362– 4. Under section
358(a), FC’s shareholders will take the DC stock
with a basis determined by reference to their FC
stock basis.
(iii) FC’s property used in U.S. trade or business. (A) Facts. The facts are the same as in paragraph (i)(A) of this Example 1, except that FC is
engaged in a U.S. trade or business and uses all the
properties in that U.S. trade or business. In this case,
none of the properties would be importation property
because FC would take any gain or loss on the
disposition of the properties into account in determining its federal income tax liability. Accordingly,
this section does not apply to the transaction.
(B) Basis of property received in transaction.
Following the application of section 362(e)(1) and
this section, the provisions of section 362(e)(2) must
be taken into account because the transfer is a section 362(a) transaction. Taking into account the application of section 362(e)(1) and this section but
without taking into account the provisions of section
362(e)(2), DC’s aggregate basis in the transferred
properties would be $300 ($40 ⫹ $120 ⫹ $140)
under section 362(a) and the properties’ aggregate
value immediately after the transfer would be $200
($150 ⫹ $30 ⫹ $20). Therefore, FC has a net
built-in loss and FC’s transfer of A1, A2, and A3 is
a loss duplication transaction. Accordingly, under
the general rule of section 362(e)(2), FC’s $100 net
built-in loss ($300 aggregate basis over $200 aggre-

April 11, 2016

gate value) would be allocated proportionately (by
the amount of built-in loss in each property) to
reduce DC’s basis in the loss properties, A2 and A3.
See § 1.362– 4. As a result, DC’s basis in A2 would
be $77.14 ($120 basis under section 362(a) reduced
by $42.86, A2’s proportionate share of FC’s net
built-in loss, computed as $90/$210 x $100) and
DC’s basis in A3 would be $82.86 ($140 basis under
section 362(a) reduced by $57.14, A3’s proportionate share of FC’s net built-in loss, computed as
$120/$210 x $100). However, if FC and DC were to
elect under section 362(e)(2)(C) to apply the $100
basis reduction to FC’s basis in the DC stock received in the transaction, DC’s bases in A2 and A3
would remain their section 362(a) bases of $120 and
$140, respectively. Under section 362(a), DC’s basis
in A1 is $40 (irrespective of whether the section
362(e)(2)(C) election is made). If FC and DC do not
make a section 362(e)(2)(C) election, FC’s basis in
the DC stock received in the exchange will be $300;
if FC and DC do make the election, FC’s basis in the
DC stock will be $200 ($300 – $100 net built-in
loss). See § 1.362– 4(b).
Example 2. Multiple transferors. (i) Facts. The
facts are the same as in paragraph (i)(A) of Example
1 of this paragraph (f), except that FC only owns A1
(basis $40, value $150) and A2 (basis $120, value
$30) and F owns A3 (basis $140, value $20). On
Date 1, FC transfers A1 and A2, and F transfers A3,
to DC in a single transaction described in section
351.
(ii) Importation property. A1 and A2 are importation properties for the reasons set forth in paragraph (i)(B) of Example 1 of this paragraph (f). A3 is
also an importation property because, if F had sold
A3 immediately before the transaction, no gain or
loss recognized on the sale would have been taken
into account in determining a federal income tax
liability, and, further, if DC had sold A3 immediately
after the transaction, DC would take into account any
gain or loss recognized on the sale in determining its
federal income tax liability.
(iii) Loss importation transaction. The transfers
by FC and F are a section 362 transaction. The
transaction is a loss importation transaction for the
reasons set forth in paragraph (i)(C) of Example 1 of
this paragraph (f) (notwithstanding that one of the
transferors, FC, did not transfer a net built-in loss).
See paragraph (c)(3) of this section.
(iv) Application of section 362(e)(1) and this
section to importation property received in loss importation transaction. Because the importation properties, A1, A2, and A3, were transferred in a loss
importation transaction, paragraph (b)(1) of this section applies and DC’s basis in A1, A2, and A3 will
each be equal to the property’s value ($150, $30, and
$20, respectively) immediately after the transfer.
(v) Basis of property received in transaction.
Following the application of section 362(e)(1) and
this section, the provisions of section 362(e)(2) must
be taken into account because the transfer is a section 362(a) transaction. The application of section
362(e)(2) is determined separately for each transferor. See § 1.362– 4(b). Taking into account the
application of section 362(e)(1) and this section,
neither DC’s aggregate basis in FC’s properties nor
DC’s basis in F’s property would exceed the properties’ respective values immediately after the trans-

April 11, 2016

action. Therefore neither FC nor F has a net built-in
loss, neither transfer is a loss duplication transaction,
and section 362(e)(2) does not apply to either transfer. DC’s bases in A1, A2, and A3, as determined
under paragraph (iv) of this Example 2, are $150,
$30, and $20, respectively. Under section 358(a),
FC’s basis in the DC stock received is $160 ($40 ⫹
$120) and F’s basis in the DC stock received in the
exchange is $140.
Example 3. Transfer of importation and nonimportation property. (i) Facts. As in paragraph (i)
of Example 2, FC owns A1 (basis $40, value $150)
and A2 (basis $120, value $30), and F owns A3
(basis $140, value $20). In addition, A2 is a U.S. real
property interest as defined in section 897(c)(1). On
Date 1, FC transfers A1 and A2, and F transfers A3, to
DC in a single transaction described in section 351.
(ii) Importation property. A1 and A3 are importation properties for the reasons set forth in paragraph (i)(B) of Example 1 and paragraph (ii) of
Example 2 of this paragraph (f), respectively. However, A2 is not importation property because, if FC
had sold A2 immediately before the transaction, FC
would take into account any gain or loss recognized
on the sale in determining its federal income tax
liability.
(iii) Loss importation transaction. FC’s and F’s
transfer is a section 362 transaction. Furthermore,
but for section 362(e)(1) and this section and section
362(e)(2), DC’s aggregate basis in the importation
properties, A1 and A3, would be $180 ($40 ⫹ $140)
and the properties’ aggregate value would be $170
($150 ⫹ $20) immediately after the transaction.
Therefore, the importation properties’ aggregate basis would exceed their aggregate value immediately
after the transaction, and the transfer is a loss importation transaction.
(iv) Application of section 362(e)(1) and this
section to importation property received in loss importation transaction. Because the importation properties, A1 and A3, were transferred in a loss importation transaction, paragraph (b)(1) of this section
applies and DC’s basis in A1 and in A3 will each be
equal to the property’s value ($150 and $20, respectively) immediately after the transfer.
(v) Basis of property received in transaction.
Following the application of section 362(e)(1) and
this section, the provisions of section 362(e)(2) must
be taken into account because the transfer is a section 362(a) transaction. The application of section
362(e)(2) is determined separately for each transferor. See § 1.362– 4(b).
(A) FC’s transfer. Taking into account the application of section 362(e)(1) and this section but
without taking into account the provisions of section
362(e)(2), DC would have an aggregate basis of
$270 in the transferred properties ($150 in A1, as
determined under paragraph (iv) of this Example 3,
plus $120 in A2, determined under section 362(a)),
and the properties would have an aggregate value of
$180 ($150 ⫹ $30) immediately after the transfer.
Therefore, FC has a net built-in loss and FC’s transfer of A1 and A2 is a loss duplication transaction.
Accordingly, under the general rule of section
362(e)(2), FC’s $90 net built-in loss ($270 aggregate
basis to DC over $180 aggregate value) would be
allocated proportionately to reduce DC’s basis in the
loss property transferred by FC. As a result, FC’s

558

entire net built-in loss would be allocated to A2, the
only loss property transferred by FC, and DC’s basis
in A2 would be $30 ($120 basis under section 362(a)
reduced by $90 net built-in loss). However, if FC
and DC were to elect under section 362(e)(2)(C) to
apply the $90 basis reduction to FC’s basis in the DC
stock received in the transaction, DC’s basis in A2
would remain its section 362(a) basis of $120. DC’s
basis in A1 is $150 as determined under paragraph
(iv) of this Example 3 (irrespective of whether the
section 362(e)(2)(C) election is made). If FC and DC
do not make a section 362(e)(2)(C) election, FC’s
basis in the DC stock received in the exchange will
be $160; if FC and DC do make the election, FC’s
basis in the DC stock will be $70 ($160 – $90 net
built-in loss). See § 1.362– 4.
(B) F’s transfer of A3. Taking into account the
application of section 362(e)(1) and this section,
DC’s basis in A3, the property transferred by F,
would not exceed its value immediately after the
transfer. Therefore, F does not have a built-in loss,
F’s transfer is not a loss duplication transaction, and
section 362(e)(2) does not apply to F’s transfer.
DC’s basis in A3, as determined under paragraph
(iv) of this Example 3, is $20. Under section 358(a),
F receives the DC stock with a basis of $140.
Example 4. Multiple transferors of nonimportation properties. (i) Facts. DC1 owns A1 (basis $40, value $150). In addition, as in Example 3 of
this paragraph (f), FC owns A2 (basis $120, value
$30), a U.S. real property interest as defined in
section 897(c)(1), and F owns A3 (basis $140, value
$20). On Date 1, DC1 transfers A1, FC transfers A2,
and F transfers A3, to DC in a single transaction
described in section 351.
(ii) Importation property. A2 is not importation
property and A3 is importation property for the reasons set forth in paragraph (ii) of Example 3 and
paragraph (i)(B) of Example 1 of this paragraph (f),
respectively. A1 is not importation property because,
if DC1 had sold A2 immediately before the transaction, DC1 would take into account any gain or loss
recognized on the sale in determining its federal
income tax liability.
(iii) Loss importation transaction. The transfer of
A1, A2, and A3 is a section 362 transaction. Furthermore, but for section 362(e)(1) and this section
and section 362(e)(2), DC’s basis in importation
property, A3, would be $140 and the value of the
property would be $20 immediately after the transaction. Therefore, the importation property’s basis
would exceed value and the transfer is a loss importation transaction.
(iv) Application of section 362(e)(1) and this
section to importation property received in loss importation transaction. Because the importation property, A3, was transferred in a loss importation transaction, section 362(e)(1) and paragraph (b)(1) of this
section apply and DC’s basis in A3 will be equal to
A3’s $20 value immediately after the transfer.
(v) Basis of property received in transaction.
Following the application of section 362(e)(1) and
this section, the provisions of section 362(e)(2) must
be taken into account because the transfer is a section 362(a) transaction. The application of section
362(e)(2) is determined separately for each transferor. See § 1.362– 4.

Bulletin No. 2016 –15

(A) DC1’s transfer. Taking into account the application of section 362(e)(1) and this section, DC’s
basis in A1 ($40 under section 362(a)) would not
exceed its value immediately after the transfer.
Therefore, DC1 does not have a net built-in loss,
DC1’s transfer is not a loss duplication transaction,
and section 362(e)(2) does not apply to DC1’s transfer. DC’s basis in A1, determined under section
362(a), is $40. Under section 358(a), DC1 receives
the DC stock with a basis of $40.
(B) FC’s transfer. Taking into account the application of section 362(e)(1) and this section, but without taking into account the provisions of section
362(e)(2), DC would have a section 362(a) basis of
$120 in A2, which would exceed A2’s $30 value
immediately after the transfer. Therefore, FC has a
net built-in loss and FC’s transfer of A2 is a loss
duplication transaction. Accordingly, under the general rule of section 362(e)(2), FC’s $90 net built-in
loss (DC’s $120 basis in A2 over A2’s $30 value)
would be applied to reduce DC’s basis in A2, the only
loss property transferred by FC. As a result, DC’s basis
in A2 would be $30 ($120 basis under section 362(a),
reduced by the $90 net built-in loss). However, if FC
and DC were to elect under section 362(e)(2)(C) to
apply the $90 basis reduction to FC’s basis in the DC
stock received in the transaction, DC’s basis in A2
would be its $120 basis determined under section
362(a). If FC and DC do not make a section
362(e)(2)(C) election, FC’s basis in the DC stock received in the exchange will be $120; if FC and DC do
make the election, FC’s basis in the DC stock will be
$30 ($120 – $90). See § 1.362– 4.
(C) F’s transfer. F’s transfer of A3 is a transaction described in section 362(a). However, taking
into account the application of section 362(e)(1) and
this section, DC’s basis in A3 ($20) would not exceed its value immediately after the transfer. Therefore, F does not have a built-in loss, F’s transfer is
not a loss duplication transaction, and section
362(e)(2) does not apply to F’s transfer. DC’s basis
in A3, as determined under paragraph (iv) of this
Example 4, is $20. Under section 358(a), F receives
the DC stock with a basis of $140.
Example 5. Partnership transactions. (i) Transfer by foreign partnership, foreign and domestic
partners. (A) Facts. A and F are equal partners in
FP. FP owns A1 (basis $100, value $70). Under the
terms of the FP partnership agreement, FP’s items of
income, gain, deduction, and loss are allocated
equally between A and F. Section 704(c) does not
apply with respect to the partnership property. FP
transfers A1 to DC in a transfer to which section 351
applies. No election is made under section 362(e)(2)(C).
(B) Importation property. If FP had sold A1
immediately before the transaction, any gain or loss
recognized on the sale would be allocated to and
includible by A and F equally under the partnership
agreement. Thus, under paragraph (d)(2) of this section, A1 is treated as tentatively divided into two
equal portions, one treated as owned by A and one
treated as owned by F. If FP had sold A1 immediately before the transaction, any gain or loss recognized on the portion treated as owned by A would
have been taken into account in determining a federal income tax liability (A’s); thus A’s tentatively
divided portion of A1 is not importation property.
However, no gain or loss recognized on the tenta-

Bulletin No. 2016 –15

tively divided portion treated as owned by F would
have been taken into account in determining a federal income tax liability. Further, if DC had sold A1
immediately after the transaction, any gain or loss
recognized on the sale would have been taken into
account in determining a federal income tax liability
(DC’s); thus, F’s tentatively divided portion of A1 is
importation property.
(C) Loss importation transaction. FP’s transfer
of A1 is a section 362 transaction. Furthermore, but
for section 362(e)(1) and this section and section
362(e)(2), DC’s basis in the importation property,
F’s portion of A1, would be $50 under section 362(a)
and the property’s value would be $35 immediately
after the transaction. Therefore, the importation
property’s basis would exceed its value and the
transfer is a loss importation transaction.
(D) Application of section 362(e)(1) and this
section to importation property received in loss importation transaction. Because the importation property, F’s tentatively divided portion of A1, was transferred in a loss importation transaction, section
362(e)(1) and paragraph (b)(1) of this section apply
and DC’s basis in F’s portion of A1 will be equal to
its $35 value.
(E) Basis of property received in transaction.
Following the application of section 362(e)(1) and
this section, the provisions of section 362(e)(2) must
be taken into account because the transfer is a section 362(a) transaction. Taking into account the application of section 362(e)(1) and this section but
without taking into account the provisions of section
362(e)(2), DC’s aggregate basis in A1 would be $85
(the sum of the $35 basis in F’s tentatively divided
portion of A1, as determined under paragraph (i)(D)
of this Example 5, and the $50 basis in A’s tentatively divided portion of A1, determined under section 362(a), see paragraphs (d)(2) and (e)(3) of this
section) and A1’s value immediately after the transfer would be $70. Therefore, FP has a net built-in
loss and FP’s transfer of A1 is a loss duplication
transaction. Accordingly, under the general rule of
section 362(e)(2), FP’s $15 net built-in loss ($85
basis over $70 value) would be allocated to reduce
DC’s basis in the loss asset, A1, the only loss property transferred by FP. As a result, DC’s basis in A1
would be $70 ($85 basis under section 362(a) and
this section, reduced by the $15 net built-in loss).
Under section 358, FP’s basis in the DC stock received in the exchange will be $100. See § 1.362– 4.
(ii) Transfer with election to apply section
362(e)(2)(C). The facts are the same as in paragraph
(i)(A) of this Example 5, except that FP and DC elect
to apply section 362(e)(2)(C) to reduce FP’s basis in
the DC stock received in the exchange. The analysis
and results are the same as in paragraphs (i)(B), (C),
(D), and (E) of this Example 5, except that the $15
reduction to DC’s basis in A1 is not made and, as a
result, DC’s basis in A1 remains $85, and FP’s basis
in the DC stock received in the exchange is reduced
from $100 to $85. The $15 reduction to FP’s basis in
DC stock reduces A’s basis in its FP interest under
section 705(a)(2)(B). See § 1.362– 4(e)(1).
(iii) Transfer by domestic partnership. The facts
are the same as in paragraph (i)(A) of this Example
5 except that FP is a domestic partnership. The
analysis and results are the same as in paragraphs
(i)(B), (C), (D), and (E) of this Example 5.

559

(iv) Transfer of interest in partnership with liability. (A) Facts. F and two other individuals are
equal partners in FP. F’s basis in its partnership
interest is $247. F’s share of FP’s § 1.752–1 liabilities (as defined in § 1.752–1(a)(4)) is $150. F transfers his partnership interest to DC in a transaction to
which section 351 applies. If DC were to sell the FP
interest immediately after the transfer, DC would
receive $100 in cash or other property. In addition,
taking into account the rules under § 1.752– 4, DC’s
share of FP’s § 1.752–1 liabilities (as defined in
§ 1.752–1(a)(4)) is $145 immediately after the transfer.
(B) Importation property. If F had sold his partnership interest immediately before the transaction,
no gain or loss recognized on the sale would have
been taken into account in determining a federal
income tax liability. Further, if DC had sold the
partnership interest immediately after the transaction, any gain or loss recognized on the sale would
have been taken into account in determining a federal income tax liability. Therefore, F’s partnership
interest is importation property.
(C) Loss importation transaction. F’s transfer is
a section 362 transaction. However, but for section
362(e)(1) and this section and section 362(e)(2),
DC’s basis in the importation property, the partnership interest, determined under section 362(a) and
taking into account the rules under section 752,
would be $242 (F’s $247 basis reduced by F’s $150
share of FP liabilities and increased by DC’s $145
share of FP liabilities) and, under paragraph (c)(4)(ii)
of this section, the value of the FP interest would be
$245 (the sum of $100, the cash DC would receive if
DC immediately sold the partnership interest, and
$145, DC’s share of the § 1.752–1 liabilities (as
defined in § 1.752–1(a)(4)) under section 752 immediately after the transfer to DC). Therefore, the importation property’s basis ($242) would not exceed
its value ($245), and the transfer is not a loss importation transaction.
(D) Basis in property received in transaction.
Following the application of section 362(e)(1) and
this section, the provisions of section 362(e)(2) must
be taken into account because the transfer is a section 362(a) transaction. As described in paragraph
(iv)(C) of this Example 5, taking into account the
application of section 362(e)(1) and this section,
DC’s basis in the partnership interest would not
exceed its value. Therefore, under § 1.362– 4, F does
not have a net built-in loss, the transfer is not a loss
duplication transaction, and section 362(e)(2) does
not apply to the transfer. DC’s basis in F’s partnership interest is $242, determined under sections
362(a) and 752. Under section 358, taking into account the rules under section 752, F’s basis in the DC
stock received in the exchange is $97 ($247 reduced
by F’s $150 share of FP liabilities). If FP had elected
under section 754, or if section 743(b) required a
downward basis adjustment to the partnership property, FP would apply the rules of § 1.743–1 to
determine the amount of the basis adjustment to the
partnership property.
Example 6. Transactions involving tax-exempt
entities. (i) Exempt transferor. (A) Facts. InsCo is a
benevolent life insurance association of a purely
local character exempt from federal income tax under section 501(a) because it is described in section
501(c)(12). InsCo owns shares of stock of DC1

April 11, 2016

(basis $100, value $70) for investment purposes,
which are not debt-financed property (as defined in
section 514). On December 31, Year 1, InsCo transfers the DC1 stock to DC in exchange for DC stock
in a transaction to which section 351 applies. No
election is made under section 362(e)(2)(C).
(B) Importation property. If InsCo had sold the
DC1 stock immediately before the transaction, any
gain or loss realized would be excluded from UBTI
under section 512(b)(5), and thus no gain or loss
recognized on the sale would have been taken into
account in determining federal income tax liability.
Further, if DC had sold the DC1 stock immediately
after the transaction, any gain or loss recognized on
the sale would have been taken into account in
determining federal income tax liability. Therefore,
the DC1 stock is importation property.
(C) Loss importation transaction. InsCo’s transfer is a section 362 transaction. Furthermore, but for
section 362(e)(1) and this section and section
362(e)(2), DC’s basis in importation property, the
DC1 stock, would be $100, and the stock’s value
would be $70 immediately after the transaction.
Therefore, the importation property’s basis would
exceed its value and the transfer is a loss importation
transaction.
(D) Application of section 362(e)(1) and this
section to importation property received in loss importation transaction. Because the importation property, the DC1 stock, was transferred in a loss importation transaction, paragraph (b)(1) of this section
applies and DC’s basis in the stock will be equal to
its $70 value.
(E) Basis of property received in transaction.
Following the application of section 362(e)(1) and
this section, the provisions of section 362(e)(2) must
be taken into account because the transfer is a section 362(a) transaction. Taking into account the application of section 362(e)(1) and this section, DC’s
basis in the DC1 stock does not exceed its value
immediately after the transaction. Therefore, InsCo
does not have a net built-in loss, InsCo’s transfer is
not a loss duplication transaction, and section
362(e)(2) has no application to the transaction. DC’s
basis in the DC1 stock, as determined under paragraph (i)(D) of this Example 6, is $70. Under section
358, InsCo’s basis in the DC stock received in the
exchange will be $100.
(ii) Transferor loses tax-exempt status. (A)
Facts. The facts are the same as in paragraph (i)(A)
of this Example 6 except that InsCo fails to be
described in section 501(c)(12) in Year 1.
(B) Importation property. If InsCo had sold the
DC1 stock immediately before the transaction, any
gain or loss recognized on the sale would have been
taken into account in determining a federal income
tax liability. Therefore, the DC1 stock is not importation property and this section does not apply to the
transaction.
(C) Basis of property received in transaction.
Following the application of section 362(e)(1) and
this section, the provisions of section 362(e)(2) must
be taken into account because the transfer is a section 362(a) transaction. Taking into account the application of section 362(e)(1) and this section but
without taking into account the provisions of section
362(e)(2), DC would have a section 362(a) basis of
$100 in the stock, which would exceed its value of

April 11, 2016

$70 immediately after the transfer. Therefore, InsCo
has a net built-in loss and InsCo’s transfer of the
DC1 stock is a loss duplication transaction. Accordingly, under the general rule of section 362(e)(2),
InsCo’s $30 net built-in loss ($100 basis over $70
value) would be allocated to reduce DC’s basis in the
loss asset, the DC1 stock, the only loss property
transferred by InsCo. As a result, DC’s basis in the
DC1 stock would be $70 ($100 basis under section
362(a), reduced by the $30 net built-in loss). Under
section 358, InsCo’s basis in the DC stock received
in the exchange will be $100.
(iii) Transfer of property that is subject to unrelated business tax. (A) Facts. The facts are the same
as in paragraph (i)(A) of this Example 6 except that,
on December 31, Year 1, instead of the DC1 stock,
InsCo transfers A1 (basis $200, value $150) to DC.
A1 is real property that InsCo owned from January 1
to December 31 of Year 1. During the entirety of this
period, A1’s basis was $200, and in the twelve
months prior to December 31, Year 1, the highest
amount of outstanding principal indebtedness on A1
was $40. For purposes of the UBTI rules under
section 512, A1 is debt-financed property within the
meaning of section 514(b).
(B) Importation property. If InsCo had sold A1
immediately before the transaction, 20 percent of
any gain or loss recognized on that sale (that is, $40
of acquisition indebtedness on A1 divided by A1’s
$200 basis in Year 1) would, under sections 512 and
514, be includible in UBTI at the end of Year 1, and
80 percent would not. Thus, under paragraph (d)(4)
of this section, A1 is treated as tentatively divided
into two portions, one reflecting the gain or loss that
would be taken into account in determining a federal
income tax liability in InsCo’s hands immediately
before the transfer (the 20 percent portion) and one
that would not (the 80 percent portion). Further, if
DC sold A1 immediately after the transfer, any gain
or loss on both portions would be taken into account
in determining a federal income tax liability. Accordingly, the 20 percent portion is not importation
property, but the 80 percent portion is.
(C) Loss importation transaction. InsCo’s transfer of A1 is a section 362 transaction. Furthermore,
but for section 362(e)(1) and this section and section
362(e)(2), DC’s basis in the importation property,
the 80 percent portion of A1, would be $160 (80
percent of InsCo’s $200 basis) under section 362(a)
and the property’s value would be $120 (80% of
A1’s $120 value) immediately after the transaction.
Therefore, the importation property’s basis would
exceed its value and the transfer is a loss importation
transaction.
(D) Application of section 362(e)(1) and this
section to importation property received in loss importation transaction. Because the importation property, the 80 percent portion of A1, was transferred in
a loss importation transaction, section 362(e)(1) and
paragraph (b)(1) of this section apply and DC’s basis
in that portion of A1 will be equal to its $120 value.
(E) Basis of property received in transaction.
Following the application of section 362(e)(1) and
this section, the provisions of section 362(e)(2) must
be taken into account because the transfer is a section 362(a) transaction. Taking into account the application of section 362(e)(1) and this section but
without taking into account the provisions of section

560

362(e)(2), DC’s aggregate basis in A1 would be
$160 (the sum of the $120 basis in the 80 percent
importation portion of A1, as determined under paragraph (iii)(D) of this Example 6, and the $40 basis in
the 20 percent portion of A1 that is not importation
property, determined under section 362(a). See paragraph (e)(3) of this section). Further, A1’s value
immediately after the transfer would be $150. Therefore, InsCo has a net built-in loss in A1, and InsCo’s
transfer of A1 is a loss duplication transaction. Accordingly, under the general rule of section
362(e)(2), InsCo’s $10 net built-in loss ($160 basis
over $150 value) would be allocated to reduce DC’s
basis in the loss asset, A1, the only loss property
transferred by InsCo. As a result, DC’s basis in A1
would be $150 ($160 basis under section 362(a) and
this section, reduced by the $10 net built-in loss).
Under section 358, InsCo’s basis in the DC stock
received in the exchange will be $200. See
§ 1.362– 4.
(iv) Transfer with election to apply section
362(e)(2)(C). The facts are the same as in paragraph
(iii)(A) of this Example 6, except that InsCo and DC
elect to apply section 362(e)(2)(C) to reduce InsCo’s
basis in the DC stock received in the exchange. The
analysis and results are the same as in paragraphs
(iii)(B), (C), (D), and (E) of this Example 6, except
that the $10 reduction to DC’s basis in A1 is not
made and, as a result, DC’s basis in A1 remains
$160; however, InsCo’s basis in the DC stock received in the exchange is reduced from $200 to
$190.
Example 7. Transactions involving CFCs. (i)
Transfer by CFC. (A) Facts. FC is a CFC with 100
shares of stock outstanding. A owns 60 of the shares
and F owns the remaining 40 shares. FC owns two
assets, A1 (basis $70, value $100), which is used in
the conduct of a U.S. trade or business, and A2 (basis
$100, value $75), which is not used in the conduct of
a U.S. trade or business. FC transfers both assets to
DC in a transaction to which section 351 applies.
(B) Importation property. If FC had sold A1
immediately before the transaction, any gain or loss
recognized on the sale would have been taken into
account in determining a federal income tax liability
(FC’s). See section 882(a). Therefore, A1 is not
importation property. If FC had sold A2 immediately
before the transaction, FC would not take the gain or
loss recognized into account in determining its federal income tax liability, but the gain or loss could be
taken into account in determining a section 951
inclusion to FC’s U.S. shareholders. However, under
paragraph (d)(3) of this section, gain or loss is not
deemed taken into account in determining a federal
income tax liability solely because it could affect an
inclusion under section 951(a). Further, if DC had
sold A2 immediately after the transaction, any gain
or loss recognized on the sale would have been taken
into account in determining a federal income tax
liability. Therefore, A2 is importation property.
(C) Loss importation transaction. FC’s transfer
is a section 362 transaction. Furthermore, but for
section 362(e)(1) and this section and section
362(e)(2), DC’s basis in the importation property,
A2, would be $100 and the property’s value would
be $75 immediately after the transaction. Therefore, the importation property’s basis would ex-

Bulletin No. 2016 –15

ceed its value and the transfer is a loss importation
transaction.
(D) Application of section 362(e)(1) and this
section to importation property received in loss importation transaction. Because the importation property, A2, was transferred in a loss importation transaction, paragraph (b)(1) of this section applies and
DC’s basis in A2 will be equal to A2’s $75 value
immediately after the transfer.
(E) Basis of property received in transaction.
Following the application of section 362(e)(1) and
this section, the provisions of section 362(e)(2) must
be taken into account because the transfer is a section 362(a) transaction. Taking into account the application of section 362(e)(1) and this section but
without taking into account the provisions of section
362(e)(2), DC would have an aggregate basis of
$145 in the transferred properties ($70 in A1, determined under section 362(a), plus $75 in A2, determined under this section) and the properties would
have an aggregate value of $175 ($100 ⫹ $75)
immediately after the transfer. Therefore, FC does
not have a net built-in loss, FC’s transfer is not a loss
duplication transaction, and section 362(e)(2) does
not apply to the transaction. DC’s basis in A1 will be
$70, determined under section 362(a), and DC’s
basis in A2 will be $75, as determined under paragraph (i)(D) of this Example 7. Under the general
rule in section 358(a), FC receives the DC stock with
a basis of $170 ($70 attributable to A1 plus $100
attributable to A2).
(ii) Transfer of CFC stock. (A) Facts. The facts
are the same as in paragraph (i)(A) of this Example
7, except that A transfers its 60 shares of FC stock
(basis $80, value $105) and F transfers its 40 shares
of FC stock (basis $100, value $70) to DC in an
exchange that qualifies under section 351.
(B) Importation property. If A had sold its FC
shares immediately before the transaction, any gain
or loss recognized on the sale would have been taken
into account in determining a federal income tax
liability (A’s). Therefore, A’s FC shares are not
importation property. However, if F had sold its FC
shares immediately before the transaction, no gain or
loss recognized on the sale would have been taken
into account in determining a federal income tax
liability. Further, if DC had sold F’s FC shares
immediately after the transaction, any gain or loss
recognized on the sale would have been taken into
account in determining a federal income tax liability.
Therefore, F’s FC shares are importation property.
(C) Loss importation transaction. The transfer of
the FC shares is a section 362 transaction. Furthermore, but for section 362(e)(1) and this section and
section 362(e)(2), DC’s aggregate basis in the importation property, F’s shares of FC stock, would be
$100 under section 362(a) and the shares’ aggregate
value would be $70. Therefore, the importation
property’s aggregate basis would exceed its aggregate value, and the transfer is a loss importation
transaction.
(D) Application of section 362(e)(1) and this
section to importation property received in loss importation transaction. Because the importation property, F’s shares of FC stock, was transferred in a loss
importation transaction, paragraph (b)(1) of this section applies and DC’s aggregate basis in the shares

Bulletin No. 2016 –15

will be equal to their $70 aggregate value immediately after the transfer.
(E) Basis of property received in transaction.
Following the application of section 362(e)(1) and
this section, the provisions of section 362(e)(2) must
be taken into account because the transfer is a section 362(a) transaction. The application of section
362(e)(2) is determined separately for each transferor. See § 1.362– 4(b).
(1) A’s transfer. Taking into account the application of section 362(e)(1) and this section, DC’s
aggregate basis in the shares ($80 under section
362(a)) would not exceed the shares’ value ($105)
immediately after the transaction. Therefore A does
not have a built-in loss, A’s transfer is not a loss
duplication transaction, and section 362(e)(2) does
not apply to A’s transfer. DC’s aggregate basis in
A’s shares, determined under section 362(a), is $80.
Under section 358(a), A receives the DC stock with
a basis of $80.
(2) F’s transfer. Taking into account the application of section 362(e)(1) and this section, DC’s
aggregate basis in the shares would not exceed their
value immediately after the transaction. Therefore, F
does not have a built-in loss, F’s transfer is not a loss
duplication transaction, and section 362(e)(2) does
not apply to F’s transfer. DC’s aggregate basis in F’s
shares, as determined under paragraph (ii)(D) of this
Example 7, is $70. Under section 358(a), F receives
the DC stock with a basis of $100.
Example 8. Property subject to withholding tax.
(i) Facts. FC owns a share of DC1 stock (basis $100,
value $70) as an investment. FC receives dividends
on the share that are subject to federal withholding
tax of 30 percent of the amount received under
section 881(a); under section 1442(a), DC1 must
withhold tax on the dividends paid. FC transfers the
DC1 share to DC in a transaction to which section
351 applies.
(ii) Importation property. Although any dividends received with respect to the DC1 stock were
subject to withholding tax, if FC had sold the share
of stock of DC1, no gain or loss recognized on the
sale would have been taken into account in determining a federal income tax liability. See section
865(a)(2). Further, if DC had sold the share of DC1
stock immediately after the transaction, any gain or
loss recognized on the sale would be taken into
account in determining federal income tax liability.
Therefore, the share of DC1 stock is importation
property.
(iii) Loss importation transaction. FC’s transfer
is a section 362 transaction. Furthermore, but for
section 362(e)(1) and this section and section
362(e)(2), DC’s basis in the importation property,
the share of DC1 stock, would be $100 and the
share’s value would be $70 immediately after the
transaction. Therefore, the share’s basis would exceed its value and the transfer is a loss importation
transaction.
(iv) Application of section 362(e)(1) and this
section to importation property received in loss importation transaction. Because the importation property, the DC1 share, was transferred in a loss importation transaction, paragraph (b)(1) of this section
applies and DC’s basis in the share will be equal to
the share’s $70 value.

561

(v) Basis of property received in transaction.
Following the application of section 362(e)(1) and
this section, the provisions of section 362(e)(2) must
be taken into account because the transfer is a section 362(a) transaction. Taking into account the application of section 362(e)(1) and this section, DC’s
basis in the DC1 share would not exceed the share’s
value immediately after the transaction. Therefore,
FC does not have a net built-in loss, FC’s transfer is
not a loss duplication transaction, and section
362(e)(2) does not apply to the transaction. DC’s
basis in the DC1 share, as determined under paragraph (iv) of this Example 8, is $70. Under section
358, FC’s basis in the DC stock received in the
exchange will be $100.
Example 9. Property transferred in triangular
reorganization. (i) Foreign subsidiary. (A) Facts. P
owns the sole outstanding share of stock of FC (basis
$1), FC1 owns the sole outstanding share of FC2
(basis $100), and FC2 owns one asset, A1 (basis
$100, value $20). In a forward triangular merger
described in § 1.358 – 6(b)(2)(i), FC2 merges with
and into FC, and FC1 receives shares of P stock in
exchange for its FC2 stock. The forward triangular
merger is a transaction described in section
368(a)(2)(D) and, therefore, in section 362(b).
(B) Determining P’s basis in its FC share. Pursuant to § 1.358 – 6, for purposes of determining the
adjustment to P’s basis in its FC shares, P is treated
as though it first received A1 in a transaction in
which its basis in A1 would be determined under
section 362(b) and then it transferred A1 to FC in a
transaction in which P’s basis in its FC stock would
be determined under section 358.
(1) P’s deemed acquisition and transfer of A1. If
FC2 had sold A1 for its value immediately before the
deemed transaction, no gain or loss recognized on
the sale would have been taken into account in
determining a federal income tax liability. If P had
sold A1 immediately after the deemed transaction,
any gain or loss recognized on the sale would have
been taken into account in determining a federal
income tax liability (P’s). Therefore, with respect to
P’s deemed acquisition, A1 is importation property.
Furthermore, immediately after the deemed transaction, P’s basis in A1, but for section 362(e)(1) and
this section and section 362(e)(2), would be $100
and A1’s value is $20. Therefore, the importation
property’s basis would exceed its value and the
transfer is a loss importation transaction. Accordingly, P’s deemed basis in A1 will be equal to A1’s
$20 value.
(2) P’s FC stock basis. As a result of P’s deemed
transfer of A1 to FC (and applying the principles of
§ 1.367(b)–13), P’s basis in its FC stock is increased
by its $20 deemed basis in A1. Accordingly, following the transaction, P’s basis in its share of FC stock
will be $21 (the sum of its original $1 basis and the
$20 adjustment for the deemed transfer of A1).
(C) FC’s basis in A1. FC’s basis in A1 is determined under the rules of this section without regard
to the determination of P’s adjustment to its basis in
FC stock. If FC2 had sold A1 for its value immediately before the transaction, no gain or loss recognized on the sale would have been taken into account
in determining a federal income tax liability. However, if FC had sold A1 immediately after the transaction, no gain or loss recognized on the sale would

April 11, 2016

have been taken into account in determining a federal income tax liability, so A1 is not importation
property. Accordingly, this section will not apply to
the transaction. Although there is a net built-in loss
in A1, the transaction is not described in section
362(a), and so section 362(e)(2) and § 1.362– 4 will
not apply to the transaction. Thus, under section
362(b), FC’s basis in A1 will be $100.
(D) FC1’s basis in P stock. Under section 358,
FC1’s basis in the P stock it receives in the exchange
will be $100.
(ii) Property transferred to U.S. subsidiary in
triangular reorganization. (A) Facts. The facts are
the same as in paragraph (i)(A) of this Example 9,
except that P also owns the sole outstanding share of
DC (basis $1) and, instead of merging into FC, FC2
merged into DC.
(B) Determining P’s basis in its DC share. As
determined under paragraph (i)(B)(2) of this Example 9, P’s basis in its DC share is $21, the sum of its
original $1 basis plus the $20 adjustment for the
deemed transfer of A1.
(C) DC’s basis in A1. If FC2 had sold A1 for its
value immediately before the transaction, no gain or
loss recognized on the sale would have been taken
into account in determining a federal income tax
liability. However, if DC had sold A1 immediately
after the transaction, any gain or loss recognized on
the sale would have been taken into account in
determining a federal income tax liability, so A1 is
importation property with respect to DC. Furthermore, immediately after the transaction, DC’s basis
in A1, but for section 362(e)(1) and this section and
section 362(e)(2), would be $100 and A1’s value is
$20. Therefore, the importation property’s basis
would exceed its value and the transfer is a loss
importation transaction. Accordingly, DC’s basis in
A1 will be $20, A1’s value immediately after the
transaction.
(D) FC1’s basis in P stock. Under section 358,
FC1’s basis in the P stock it receives in the exchange
is $100.

(g) Applicability date. This section applies with respect to any transaction occurring on or after March 28, 2016, and
also with respect to any transaction occurring before such date as a result of an
entity classification election under
§ 301.7701–3 of this chapter filed on or
after March 28, 2016, unless such transaction is pursuant to a binding agreement
that was in effect prior to March 28, 2016
and at all times thereafter. In addition,
taxpayers may apply this section to any
transaction occurring after October 22,
2004.
Par. 11. Section 1.362– 4 is amended
by:
1. Revising the heading to paragraph
(c) and adding paragraph (c)(3).
2. Revising the introductory text in
paragraph (h).
3. Revising the third sentence of paragraph (h) Example 4 paragraph (iv)(B).

April 11, 2016

4. Revising paragraph (h) Example 11.
5. Adding a sentence to the end of
paragraph (j).
The revisions and additions read as follows:
§ 1.362– 4 Basis of loss duplication
property.
*****
(c) Exceptions and special rules. * * *
*****
(3) Other effects of basis determination
under this section—(i) Determination by
reference to transferor’s basis. A determination of basis under this section is a
determination by reference to the transferor’s basis, including for purposes of sections 755, 1223(2), and 7701(a)(43).
(ii) Treatment as tax-exempt income or
noncapital, nondeductible expense. A determination of basis under paragraph (b)
of this section does not give rise to an item
treated as a noncapital, nondeductible expense under § 1.1502–32(b)(2)(iii). However, a determination of basis under paragraph (d) of this section does give rise to
an item treated as a noncapital, nondeductible expense under § 1.1502–
32(b)(2)(iii).
*****
(h) Examples. The examples in this
paragraph (h) illustrate the application of
section 362(e)(2) and the provisions of
this section. Unless the facts otherwise
indicate, the examples use the following
nomenclature and assumptions: X, Y, P,
S, S1, and S2 are domestic corporations;
A and B are U.S. individuals; FC1 and
FC2 are foreign corporations and are not
engaged in a U.S. trade or business, have
no U.S. real property interests, and have
no other relationships, activities, or interests that would cause them, their shareholders, or their property to be subject to
tax imposed under any provision of subtitle A of the Internal Revenue Code (federal income tax); there is no applicable
income tax treaty; PRS is a domestic partnership; no election is made under section
362(e)(2)(C); and the transferred property
is not importation property (as defined in
§ 1.362–3(c)(2)) and the transfers are not
loss importation transactions (as defined
in § 1.362–3(c)(3)), so that the basis of no
property is determined under section
362(e)(1). All persons and transactions are

562

unrelated unless the facts indicate otherwise, all taxpayers are on a calendar tax
year, and all other relevant facts are set
forth in the examples. See § 1.362–3(f) for
additional examples illustrating the application of section 362(e)(2) and this section, including to transactions that are subject to section 362(e)(2), and section
362(e)(1).
*****
Example 4. * * *

(iv) * * *
(B) Analysis. * * * For the reasons set forth in
paragraph (iii)(B) of this Example 4, Y would have
been required to reduce its basis in the transferred
assets by $1.60. * * *

*****
Example 11. Transfers of importation property
with non-importation property. (i) Single transferor,
loss importation transaction. (A) Facts. FC1 transfers Asset 1 (basis $80, value $50), Asset 2 (basis
$120, value $110), and Asset 3 (basis $32, value
$40) to DC in a transaction to which section 351
applies. Asset 1 is not importation property within
the meaning of § 1.362–3(c)(2). Asset 2 and Asset 3
are importation property within the meaning of
§ 1.362–3(c)(2).
(B) Application of section 362(e)(1). Immediately after the transfer, and without regard to section 362(e)(1) or section 362(e)(2) and this section, DC’s aggregate basis in importation property
(Asset 2 and Asset 3) would be $152. The aggregate value of the importation property immediately after the transfer is $150. Accordingly, the
transaction is a loss importation transaction within
the meaning of § 1.362–3(c)(3) and, under section
362(e)(1), DC’s bases in Asset 2 and Asset 3
would equal the value of each, $110 and $40,
respectively.
(C) Application of section 362(e)(2) and this
section. (1) Analysis. (i) Loss duplication transaction. FC1’s transfer of Asset 1, Asset 2, and Asset 3
is a transaction described in section 362(a). But for
section 362(e)(2) and this section, DC’s aggregate
basis in those assets would be $230 ($80 under
section 362(a) ⫹ $110 ⫹$40 under section
362(e)(1)), which would exceed the aggregate value
of the assets $200 ($50 ⫹ $110 ⫹$40) immediately
after the transaction. Accordingly, the transfer is a
loss duplication transaction and FC1 has a net
built-in loss of $30 ($230 – $200).
(ii) Identifying loss duplication property. But for
section 362(e)(2) and this section, DC’s basis in
Asset 1 would be $80, which would exceed Asset 1’s
$50 value immediately after the transaction. Accordingly, Asset 1 is loss duplication property. But for
section 362(e)(2) and this section, DC’s basis in
Asset 2 would be $110, which would not exceed
Asset 2’s $110 value immediately after the transaction. Accordingly, Asset 2 is not loss duplication
property. But for section 362(e)(2) and this section,
DC’s basis in Asset 3 would be $40, which would
not exceed Asset 3’s $40 value immediately after the
transaction. Accordingly, Asset 3 is not loss duplication property.

Bulletin No. 2016 –15

(D) Basis in loss duplication property. DC’s
basis in Asset 1 is $50, computed as its $80 basis
under section 362(a) reduced by FC1’s $30 net
built-in loss.
(E) Basis in other property. Under section
362(e)(1), DC’s basis in Asset 2 is $110 and DC’s
basis in Asset 3 is $40. Under section 358(a), FC1
has an exchanged basis of $232 in the DC stock it
receives in the transaction.
(ii) Multiple transferors, no importation of loss.
(A) Facts. The facts are the same as paragraph (i)(A)
of this Example 11, except that, in addition, FC2
transfers Asset 4 (basis $100, value $150) to DC as
part of the same transaction. Asset 4 is importation
property within the meaning of § 1.362–3(c)(2).
(B) Application of section 362(e)(1). Immediately after the transfer, and without regard to section
362(e)(1) or section 362(e)(2) and this section, DC’s
aggregate basis in importation property (Asset 2,
Asset 3, and Asset 4) would be $252 ($120 ⫹ $32 ⫹
$100). The aggregate value of the importation property immediately after the transfer is $300 ($110 ⫹
$40 ⫹ $150). Accordingly, the transaction is not a
loss importation transaction within the meaning of
§ 1.362–3(c)(3) and DC’s bases in the importation
property is not determined under section 362(e)(1).
(C) Application of section 362(e)(2) and this
section. Notwithstanding that the transfers by FC1
and FC2 are pursuant to a single plan forming one
transaction, section 362(e)(2) and this section apply
to each transferor separately.
(1) Application of section to FC1. (i) Loss duplication transaction. FC1’s transfer of Asset 1, Asset
2, and Asset 3 is a transaction described in section
362(a). But for section 362(e)(2) and this section,
DC’s aggregate basis in those assets would be $232
($80 ⫹ $120 ⫹$32), which would exceed the aggregate value of the assets $200 ($50 ⫹ $110 ⫹ $40)
immediately after the transaction. Accordingly, the
transfer is a loss duplication transaction and FC1 has
a net built-in loss of $32 ($232 – $200).
(ii) Identifying loss duplication property. But for
section 362(e)(2) and this section, DC’s basis in
Asset 1 would be $80, which would exceed Asset 1’s
$50 value immediately after the transaction. Accordingly, Asset 1 is loss duplication property. But for
section 362(e)(2) and this section, DC’s basis in
Asset 2 would be $120, which would exceed Asset
2’s $110 value immediately after the transaction.
Accordingly, Asset 2 is also loss duplication property. But for section 362(e)(2) and this section, DC’s
basis in Asset 3 would be $32, which would not
exceed Asset 3’s $40 value immediately after the
transaction. Accordingly, Asset 3 is not loss duplication property.
(iii) Basis in loss duplication property. DC’s
basis in Asset 1 is $56, computed as its $80 basis
under section 362(a) reduced by $24, its allocable
portion of FC1’s $32 net built-in loss ($30/40 x $32).
DC’s basis in Asset 2 is $112, computed as its $120
basis under section 362(a) reduced by $8, its allocable portion of FC1’s $40 net built-in loss ($10/$40 x
$32).
(iv) Basis in other property. Under section
358(a), FC1 has an exchanged basis of $232 in the
DC stock it receives in the transaction.
(2) Application of section to FC2. FC2’s transfer
of Asset 3 is not a loss duplication transaction be-

Bulletin No. 2016 –15

cause Asset 3’s value exceeds its basis immediately
after the transaction. Accordingly, under section
362(a), DC’s basis in Asset 3 is $100.

*****
(j) Effective/applicability date. * * *
The introductory text and Example 11 of
paragraph (h) of this section apply with
respect to transactions occurring on or after March 28, 2016, and also with respect
to transactions occurring before such date
as a result of an entity classification election under § 301.7701–3 of this chapter
filed on or after March 28, 2016, unless
such transaction is pursuant to a binding
agreement that was in effect prior to
March 28, 2016 and at all times thereafter.
In addition, taxpayers may apply such
provisions to any transaction occurring after October 22, 2004.
Par. 12. Section 1.368 –3 is amended
by revising paragraphs (a)(3) and (b)(3)
and adding a sentence to the end of paragraph (e) to read as follows:
§ 1.368 –3 Records to be kept and
information to be filed with returns.
(a) * * *
(3) The value and basis of the assets,
stock or securities of the target corporation transferred in the transaction, determined immediately before the transfer and
aggregated as follows—
(i) Importation property transferred in
a loss importation transaction, as defined
in § 1.362–3(c)(2) and (3), respectively;
(ii) Loss duplication property as defined in § 1.362– 4(g)(1);
(iii) Property with respect to which any
gain or loss was recognized on the transfer
(without regard to whether such property
is also identified in paragraph (a)(3)(i) or
(ii) of this section);
(iv) Property not described in paragraph (a)(3)(i), (ii), or (iii) of this section;
and
*****
(b) * * *
(3) The value and basis of all the stock
or securities of the target corporation held
by the significant holder that is transferred
in the transaction and such holder’s basis
in that stock or securities, determined immediately before the transfer and aggregated as follows—
(i) Stock and securities with respect to
which an election is made under section
362(e)(2)(C); and

563

(ii) Stock and securities not described
in paragraph (b)(3)(i) of this section.
*****
(e) Effective/applicability date. * * *
Paragraphs (a)(3) and (b)(3) of this section apply with respect to reorganizations
occurring on or after March 28, 2016, and
also with respect to reorganizations occurring before such date as a result of an
entity classification election under
§ 301.7701–3 of this chapter filed on or
after March 28, 2016, unless such reorganization is pursuant to a binding agreement that was in effect prior to March 28,
2016 and at all times thereafter.
Par. 13. Section 1.705–1 is amended by
revising paragraph (a)(9) to read as follows:
§ 1.705–1 Determination of basis of
partner’s interest.
(a) * * *
(9) For basis adjustments necessary to
coordinate sections 705 and 362(e)(2), see
§ 1.362– 4(e)(1).
*****
Par. 14. Section 1.755–1 is amended by
adding a sentence after the second sentence of paragraph (b)(1)(i) to read as
follows:
§ 1.755–1 Rules for allocation of basis.
*****
(b) * * *
(1) * * *
(i) Application. * * * For transfers subject to section 334(b)(1)(B), see § 1.334 –
1(b)(3)(iii)(C)(1) (treating a determination
of basis under § 1.334 –1(b)(3) as a determination not by reference to the transferor’s basis solely for purposes of applying
section 755); for transfers subject to section 362(e)(1), see § 1.362–3(b)(4)(i)
(treating a determination of basis under
§ 1.362–3 as a determination not by reference to the transferor’s basis solely for
purposes of applying section 755); for
transfers subject to section 362(e)(2), see
§ 1.362– 4(c)(3)(i) (treating a determination of basis under § 1.362– 4 as a determination by reference to the transferor’s
basis for all purposes). * * *
*****

April 11, 2016

Par. 15. Section 1.1367–1 is amended
by revising the last sentence of paragraph
(c)(2) to read as follows:
§ 1.1367–1 Adjustments to basis of
shareholder’s stock in an S corporation.
*****
(c) * * *
(2) Noncapital, nondeductible expenses.
* * * For basis adjustments necessary to
coordinate sections 1367 and 362(e)(2), see
§ 1.362– 4(e)(2).
*****

John M Dalrymple,
Deputy Commissioner for
Services and Enforcement.
Approved: February 16, 2016.
Mark J. Mazur,
Assistant Secretary of the
Treasury (Tax Policy).
(Filed by the Office of the Federal Register on March 25,
2016, 8:45 a.m., and published in the issue of the Federal
Register for March 28, 2016, 81 F.R. 17066)

the coordination rule between asset transfers and indirect stock transfers for certain
outbound asset reorganizations. The regulations also finalize modifications to the
exception to the coordination rule for section 351 exchanges so that it is consistent
with the remaining asset reorganization
exception. In addition, the regulations finalize modifications to the procedures for
obtaining relief for failures to satisfy certain reporting requirements. Finally, the
regulations finalize certain changes with
respect to transfers of stock or securities
by a domestic corporation to a foreign
corporation in a section 361 exchange.
These regulations primarily affect domestic corporations that transfer property to
foreign corporations in certain outbound
nonrecognition exchanges.
DATES: Effective Date: These regulations are effective on March 22, 2016.
Applicability Dates: For dates of applicability, see §§ 1.367(a)–3(g)(1)(vii),
1.367(a)–3(g)(1)(ix), 1.367(a)– 6(e)(4),
1.1248(f)–3(b)(1), and 1.6038B–1(g)(5).
FOR FURTHER INFORMATION
CONTACT: Joshua G. Rabon at (202)
317-6937 (not a toll-free number).

26 CFR 1.367(a)–3: Treatment of Transfers of Stock
or Securities to Foreign Corporations

SUPPLEMENTARY INFORMATION:

T.D. 9760

Background and Explanation
of Provisions

DEPARTMENT OF THE
TREASURY
Internal Revenue Service
26 CFR Part 1
Indirect Stock Transfers and
the Coordination Rule
Exceptions; Transfers of
Stock or Securities in
Outbound Asset
Reorganizations
AGENCY: Internal Revenue Service
(IRS), Treasury.
ACTION: Final regulations and removal
of temporary regulations.
SUMMARY: This document contains final regulations under sections 367, 1248,
and 6038B of the Internal Revenue Code
(Code). These regulations finalize the
elimination of one of two exceptions to

April 11, 2016

On August 20, 2008, the Department
of the Treasury (Treasury Department)
and the IRS published proposed regulations (REG–209006 – 89) under sections
367, 1248, and 6038B of the Code (2008
proposed regulations) in the Federal Register (73 FR 49278) concerning transfers
of property by a domestic corporation to a
foreign corporation in an exchange described in section 361(a) or (b) and certain
nonrecognition distributions of stock of a
foreign corporation by a domestic corporation. The 2008 proposed regulations
were substantially finalized on March 19,
2013, when the Treasury Department and
the IRS published final regulations (TD
9614) in the Federal Register (78 FR
17024). However, the Treasury Department and the IRS simultaneously published the temporary regulations (TD
9615) in the Federal Register on March
19, 2013 (78 FR 17,053) (2013 temporary
regulations) eliminating one of the two

564

exceptions to the coordination rule between asset transfers and indirect stock
transfers for certain outbound asset reorganizations, as well as modifying the one
exception to the coordination rule for section 351 exchanges so that it is consistent
with the remaining outbound asset reorganization exception. The 2013 temporary
regulations also addressed the transfer of
stock or securities by a domestic corporation to a foreign corporation in a section
361 exchange, as well as modified, in various contexts, procedures for obtaining relief
for failures to satisfy certain reporting requirements. A notice of proposed rulemaking (REG–132702–10) cross-referencing
the 2013 temporary regulations and incorporating the text of the 2013 temporary
regulations was also published in the Federal Register on March 19, 2013 (78 FR
17066). A portion of the 2013 temporary
regulations modifying the procedures for
obtaining relief for failures to satisfy certain reporting requirements was amended
and removed by final regulations (TD
9704) that were published in the Federal
Register on November 19, 2014 (79 FR
68763). No requests for a public hearing
were received regarding the 2013 temporary regulations, and accordingly no hearing was held. The text of these regulations
is substantially identical to to the 2013
temporary regulations.
The Treasury Department and the IRS
received one comment regarding the remaining exceptions to the coordination
rule. In general, the coordination rule provides that if, in connection with an indirect stock transfer, a U.S. person (U.S.
transferor) transfers assets to a foreign
corporation (foreign acquiring corporation) in an exchange described in section
351 or 361, section 367 applies first to the
asset transfer and then to the indirect stock
transfer. Pursuant to the exceptions to the
coordination rule, sections 367(a) and (d)
will not apply to the outbound transfer of
assets by the U.S. transferor to the foreign
acquiring corporation to the extent those
assets (re-transferred assets) are transferred by the foreign acquiring corporation to a domestic corporation in certain
nonrecognition transactions, provided certain conditions are satisfied. Both of the
remaining exceptions require that the
transferee domestic corporation’s adjusted
basis in the re-transferred assets not be

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