Rev. Rul. 81-32
1981-1 C.B. 131, 1981-5 I.R.B. 9.
Internal Revenue Service
Revenue Ruling
EXCHANGE OF STOCK IN FOREIGN CORPORATIONS; INDIVIDUAL SHAREHOLDER
Published: February 2, 1981
26 CFR 7.367(b)-7: Exchange of stock described in section 354
(Also Section 1248; 1.1248-4.)
Exchange of stock in foreign corporations; individual shareholder. The limitation of section 1248(b) of the Code applies to the amount an individual U.S. shareholder is required to include in gross income under section 7.367(b)- 7(c)(1)(i) of the regulations as a result of an exchange of stock of a foreign corporation for stock of another foreign corporation in a transaction to which section 7.367(b)-7(a) and (c)(1)(i) applies.
ISSUE
When an individual United States shareholder exchanges stock of a foreign corporation (F-1) for stock of another foreign
corporation (F-2) in an exchange to which sections 7.367(b)-7(a) and 7.367(b)-7(c)(1)(i) of the Temporary Income Tax Regulations apply, does the limitation of section 1248(b) of the Internal Revenue Code apply with respect to the amounts that the exchanging shareholder is required to include in gross income under section 7.367(b)-7(c)(1)(i)?
FACTS
A and B are United States citizens who owned 60 and 40 percent, respectively, of the stock of F-1, a controlled foreign corporation, as defined in section 957(a) of the Code and section 7.367(b)-(2)(a) of the temporary regulations. F- 2, an unrelated foreign corporation, acquired all of the assets of F-1 solely in exchange for F-2 voting stock, which F-1 distributed to A and B in dissolution. The acquisition by F-2 of all of the assets of F-1 would qualify as a reorganization under section 368(a)(1)(C) of the Code if F-1 and F-2 were domestic corporations. F-2 is not a controlled corporation.
LAW AND ANALYSIS
The exchanges by A and B of all of their F-1 stock for voting stock of F-2 are exchanges to which section 367(b) of the Code applies. Under section 367(b)(1), section 354 will apply to the exchanges only if A and B comply with the requirements of the temporary regulations under section 367(b).
Under section 7.367(b)-1 of the temporary regulations, A and B are required to comply with all of the requirements of section 7.367(b)-(1) through 7.367(b)-12 of the temporary regulations. Furthermore, because the exchanges of F-1 stock for F-2 stock are exchanges to which section 7.367(b)-7(a) applies, A and B are required to include in their gross income the section 1248 amounts attributable to the stock exchanged, to the extent that the fair market value of the stock exchanged exceeds its adjusted basis. Section 7.367(b)- 7(c)(1)(i). See example 5(a)(ii) of section 7.367(b)-(13).
Section 7.367(b)-2(d) of the temporary regulations defines the term 'section 1248 amount' as the earnings and profits or deficit in earnings and profits which would have been attributable under section 1248 and the regulations thereunder to the stock of the foreign corporation exchanged if the stock had been sold in a transaction to which section 1248(a) applied.
Section 7.367(b)-3(b) of the temporary regulations provides that if, under section 7.367(b)-7, any amount is required to be included in the gross income of a United States person, that amount shall be considered to have been distributed as a dividend paid in money immediately prior to the exchange and taxable under section 301 of the Code as a dividend formally declared in the same amount.
Section 7.367(b)-3(f) of the temporary regulations provides that if an amount of earnings and profits of a foreign corporation which is considered to have been distributed as a dividend is included in gross income of a United States person, the foreign tax credit provisions shall apply as if such earnings and profits were actually distributed by a foreign corporation as a dividend.
Section 1248(a) of the Code provides, in general, that if a United States person recognizes gain on a sale or exchange of stock in a foreign corporation then the gain shall be included in the gross income of such United States person as a dividend to the extent of the earnings and profits of such foreign corporation attributable to such stock. In the case of a domestic corporate shareholder, section 1.1248-1(d)(1) of the Income Tax Regulations provides generally that the foreign tax credit provisions of sections 901 through 905 shall apply to an amount included in income as a dividend under section 1248(a). While this rule does not apply to individual shareholders, section 1248(b) and section 1.1248-4 provide for a limitation on the amount of tax required to be paid by an individual shareholder by reason of an amount included in income under section 1248(a) as a dividend. This limitation takes into account the foreign taxes paid by the foreign corporation.
Section 7.367(b)-3(f) of the temporary regulations is intended to permit the exchanging United States shareholders to take the
foreign tax credit provisions into account whenever they are required to include an amount in their gross income under the temporary regulations. Accordingly, when an amount is included in the gross income of a domestic corporate shareholder under section 7.367(b)-7(c)(1), the corporate shareholder will be entitled to take into account the foreign tax credit provisions in essentially the same manner as if sections 1248(a) of the Code and 1.1248-1(d)(1) of the regulations applied. Individual United States shareholders, such as A and B, will not receive the benefit of the foreign tax credit provisions when they are required to include a similar amount in gross income unless section 1248(b) is applicable. Since section 1248(b) is generally intended to equalize the treatment under section 1248(a) between individual and corporate shareholders, and because the section 1248 amount included in income under the temporary regulations is based upon the principles of section 1248, the limitations of section 1248(b) should be applicable to the amount required to be included in the gross income of individual United States shareholders.
HOLDING
The limitation on tax under section 1248(b) will be applicable to individual shareholders A and B with respect to the section 1248 amounts they are required to include in their gross income under section 7.367(b)-7(c)(1)(i) of the temporary regulations.
Rev. Rul. 81-32, 1981-1 C.B. 131, 1981-5 I.R.B. 9.