FINAL REGULATIONS ON INBOUND REORGANIZATION OF FOREIGN CORPORATIONS WILL PREVENT DOUBLE COUNTING OF SECTION 1248 EARNINGS, SERVICE SAYS.

Concurrently with this Notice, section 7.367(b)-9 of the temporary Income Tax Regulations is being amended to provide that a foreign corporation will not succeed to the earnings and profits or deficit in earnings and profits of another foreign corporation except to the extent provided in section 381(a) of the Internal Revenue Code of 1986 and the regulations under that section if the stock of the first corporation is received in an exchange subject to section 7.367(b)-9 of the temporary regulations, and a U.S. shareholder described in section 7.367(b)-7(b) or section 7.367(b)-8(c)(1) owns (applying the attribution rules of section 958 of the Code) more than 50 percent of either the total voting power or the total value of the stock of both the corporation whose stock is received in the exchange and the corporation whose stock is exchanged. The amendment is effective on or after the date it is filed with the Federal Register.

Since under the above amendment to the temporary regulations, the foreign corporation whose stock is received in the exchange will only succeed to the earnings and profits or deficit in earnings and profits of the acquired corporation and of lower-tier subsidiaries of the acquired corporation as provided in section 381(a) of the Code and the regulations thereunder, post-exchange distributions of earnings and profits and sales of stock may in some circumstances result in double counting of section 1248 earnings. Regulations which will finalize the temporary regulations under section 367(b) will be issued to prevent this double counting of earnings and profits. The regulations with regard to this issue, when finalized, will be retroactive to the effective date of the above amendment.

ADMINISTRATIVE PRONOUNCEMENT

This document serves as an "administrative pronouncement" as that term is described in section 1.6661-3(b)(2) of the Income Tax Regulations and may be relied upon to the same extent as a revenue ruling or revenue procedure.

DRAFTING INFORMATION

The principal author of this notice is Richard L. Chewning of the Office of Associate Chief Counsel (International). For further information regarding this notice, call Mr. Chewning at 202-566-6384 (not a toll-free number), or write to CC:INTL:Br3, Room 5531, Internal Revenue Service, 1111 Constitution Avenue, N.W. Washington, D.C. 20224.