Rev. Rul. 87-47

1987-1 C.B. 250, 1987-24 I.R.B. 12.

GAIN FROM CERTAIN SALES OR EXCHANGES OF STOCK IN CERTAIN FOREIGN

CORPORATIONS

Published: June 15, 1987

Section 1248.-Gain From Certain Sales or Exchanges of Stock in Certain Foreign Corporations, 26 CFR 1.1248-1: Treatment of gain from certain sales or exchanges of stock in certain foreign corporations

  Gain from certain sales or exchanges of stock in certain foreign corporations. Section 1248(a) of the Code will apply if, in a non-section 355 transaction, a domestic corporation distributes to its domestic parent all of the stock of a domestic holding company availed of to hold the stock of a controlled foreign corporation.

ISSUE

  Whether section 1248 of the Internal Revenue Code applies if, in a non- section 355 transaction, a domestic corporation distributes to its domestic parent all of the stock of a domestic holding company availed of to hold the stock of a controlled foreign corporation.

FACTS

  P, a domestic corporation, owns all of the stock of S, which is also a domestic corporation.

  On January 1, 1983, § purchased from an unrelated third party, in a transaction in which gain or loss was recognized, all of the outstanding shares of FX, a controlled foreign corporation (CFC) as defined in section 957(a) of the Code.

  On January 1, 1986, § contributed for no consideration all of its shares of FX stock to HC, an existing wholly-owned domestic subsidiary of S. HC's only asset is the stock of FX.

  On December 31, 1986, § distributed to P all of the shares of HC stock. On the date of this distribution, the fair market value of HC's stock exceeded the adjusted basis of the HC stock in the hands of S. S, P and HC do not file a consolidated tax return.

LAW AND ANALYSIS

  For the distribution of the HC stock to qualify as a tax-free distribution under section 355 of the Code. HC must be engaged in the active conduct of a trade or business within the meaning of section 355(b). Since HC is a holding company, HC may be considered to be engaged in the active conduct of a trade or business, if at all, only through the ownership of the stock of FX, its only asset. Under section 355(b)(2)(D), since FX was acquired by § in a transaction in which gain or loss was recognized within the 5-year period preceding December 31, 1986, the date of the distribution of HC stock to P by S, HC is not active, and section 355 cannot apply.

  Section 311(d) of the Internal Revenue Code of 1954, which was amended by the Tax Reform Act of 1984 (the 1984 Act), provides that, if a corporation distributes property (other than an obligation of such corporation) to a shareholder in a distribution described in subpart A (sections 301 through 307), and the fair market value of such property exceeds its adjusted basis (in the hands of the distributing corporation), gain shall be recognized to the distributing corporation in an amount equal to such excess as if the property had been sold at the time of the distribution. The Conference Committee Report accompanying the 1984 Act states that the distribution by one domestic corporation to another of appreciated stock of a foreign corporation is subject to section 311(d) and may trigger gain recognition to the distributing corporation that may be taxable as dividend income under section 1248(a). See H.R. Rep. No. 98-861 (Conf. Rep.), 98th Cong., 2d Sess. 821 (1984), 1984-3 (Vol. 2) C.B. 77. Section 311 was amended by the Tax Reform Act of 1986 with the effect that section 311(d) was substantially recodified as section 311(b).

  Section 1248(a) of the Code provides that, if a United States person sells or exchanges stock in a foreign corporation and such person has satisfied the stock ownership requirements of section 1248(a)(2), the gain recognized on the sale or exchange of the stock will be included in the gross income of the United States person as a dividend. The amount includible as a dividend under section 1248(a) is limited to the earnings and profits of the CFC that are attributable to the United States person's stock and that were accumulated in the taxable years beginning after December 31, 1962, and during the period the foreign corporation was a CFC and the stock was held by the United States person.

  If a United States person sells or exchanges stock of a domestic corporation and such domestic corporation was formed or availed of principally for the holding, directly or indirectly, of stock of one or more foreign corporations, for purposes of section 1248 the sale or exchange will be treated as a sale or exchange of the stock of the foreign corporation or corporations held by the domestic corporation. Section 1248(e).

  Under section 1.1248-6(b)(1) of the Income Tax Regulations, if a United States person recognizes gain on the sale or exchange of stock of a domestic corporation that was formed or availed of principally for the holding of stock of a foreign corporation and the United States person would satisfy the stock ownership requirements of section 1248(a)(2) if the domestic corporation were a foreign corporation, the gain will be included in the gross income of the United States person as a dividend to the extent of the relevant earnings and profits. For purposes of computing the relevant earnings and profits, the domestic corporation shall be treated as if it were a first tier foreign corporation. Section 1.1248-6(b)(1)(i) of the regulations.

  Section 1248(c)(2) of the Code provides that for purposes of section 1248, if section 1248(a) or (f) applies to a sale or exchange by a United States person of the stock of a foreign corporation, and, by reason of owning that stock, the United States person was treated as owning under section 958(a)(2) an amount of the stock of another foreign corporation ('lower-tier corporation') that satisfied the stock ownership requirements of section 1248(a)(2), the earnings and profits of the foreign corporation attributable to the stock sold or exchanged shall be deemed to include the earnings and profits of the lower-tier corporation that are attributable to the stock of the lower-tier corporation treated as owned by the United States person on the date of the sale or exchange.

  The distribution of the HC stock by § is taxable under section 311(d), which treats the distribution of the HC stock as if the stock had been sold at the time of distribution. The Conference Report accompanying the 1984 Act implies that the deemed sale under section 311(d) is treated as an actual sale for purposes of section 1248. Under sections 1248(e) and 1.1248-6, the gain from the sale of the HC stock is treated as a dividend to the extent of the relevant earnings and profits computed as if HC were a first tier foreign subsidiary of S. Therefore, for purposes of computing the relevant earnings and profits, the distribution of the HC stock to P by § is treated as the sale or exchange of a CFC that owns all of the stock of FX.

  Under section 1248(c)(2), in calculating S's gain that will be treated as a dividend under section 1248(a) on the deemed sale of the HC stock, the earnings and profits of HC attributable to the stock owned by § will include those earnings and profits of FX that are attributable to stock owned by § and that were accumulated during the period that FX was a CFC and during which § owned the FX stock either directly under section 958(a)(1)(A) or indirectly under section 958(a)(2).

HOLDING

  When § distributes the stock of HC to P, section 311(d) of the Code requires that gain shall be recognized by § in an amount equal to the excess of the fair market value of the HC stock over its adjusted basis in S's hands. Pursuant to sections 1248(a) and 1248(e), such gain, which is attributable to the deemed disposition of the HC stock, shall be included in the gross income of § as a dividend to the extent of the relevant earnings and profits, including certain earnings and profits of FX, as provided in section 1248(c)(2).

Rev. Rul. 87-47, 1987-1 C.B. 250, 1987-24 I.R.B. 12