Failure To File Gain Recognition Agreements and Other Required Filings

AGENCY:

Internal Revenue Service (IRS), Treasury.

ACTION:

Notice of proposed rulemaking.

SUMMARY:

This document contains proposed regulations that would amend the existing rules governing the consequences to U.S. persons for failing to file gain recognition agreements (GRAs) and related documents, or to satisfy other reporting obligations, associated with certain transfers of property to foreign corporations in nonrecognition exchanges. These regulations affect U.S. persons that transfer property to foreign corporations.

DATES:

Written or electronic comments and requests for a public hearing must be received by April 1, 2013.

ADDRESSES:

Send submissions to CC:PA:LPD:PR (REG-140649-11), room 5203, Internal Revenue Service, P.O. Box 7604, Ben Franklin Station, Washington, DC 20044. Submissions may be hand-delivered Monday through Friday between the hours of 8 a.m. and 4 p.m. to CC:PA:LPD:PR (REG-140649-11), Courier's Desk, Internal Revenue Service, 1111 Constitution Avenue NW., Washington, DC 20224, or sent electronically via the Federal Rulemaking Portal at http://www.regulations.gov (IRS REG-140649-11).

FOR FURTHER INFORMATION CONTACT:

Concerning the proposed regulations, Mary W. Lyons, (202) 622-3860; concerning submission of comments and to request a hearing, Oluwafunmilayo (Funmi) Taylor, (202) 622-7180 (not toll-free numbers).

SUPPLEMENTARY INFORMATION:

Paperwork Reduction Act

The collections of information contained in the regulations have 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 1545-1487.

The collections of information are in §§ 1.367(a)-3(f)(2), 1.367(a)-8(p)(2), 1.367(e)-2(f)(2), 1.6038B-1(c)(4)(ii), and 1.6038B-1(e)(4). The collections of information are mandatory. The likely respondents are domestic corporations.

An agency may not conduct or sponsor, and a person is not required to respond to, a collection of information unless it displays a valid control number.

Books and records relating to a collection of information must be retained as long as their contents might become material in the administration of any internal revenue law. Generally, tax returns and tax return information are confidential, as required by 26 U.S.C. 6103.

Background

A. Sections 367(a) and 6038B

Section 367(a)(1) provides that if, in connection with any exchange described in section 332, 351, 354, 356, or 361, a United States person (U.S. transferor) transfers property to a foreign corporation (transferee foreign corporation), the transferee foreign corporation shall not, for purposes of determining the extent to which gain shall be recognized on such transfer, be considered to be a corporation. Sections 367(a)(2), (3), and (6) provide exceptions to the general rule of section 367(a)(1) and grant regulatory authority to the Secretary to provide additional exceptions and to limit the statutory exceptions.

Section 1.367(a)-3 provides exceptions to the general rule of section 367(a)(1) for certain transfers by a U.S. transferor of stock or securities to a foreign corporation. In some cases, these exceptions require the U.S. transferor to file a GRA and other related documents under the provisions of § 1.367(a)-8 (section 367(a) GRA regulations) in order to avoid the recognition of gain under section 367(a)(1). See § 1.367(a)-3(b), (c), and (e) (addressing transfers of foreign stock or securities, transfers of domestic stock or securities, and transfers in certain section 361 exchanges, respectively). Under the terms of a GRA, the U.S. transferor agrees to include in income the gain realized but not recognized on the initial transfer of the stock or securities and pay interest on any additional tax due if a gain recognition event, as defined in § 1.367(a)-8(b)(1)(iv), occurs during the term of the GRA (generally 60 months following the close of the taxable year in which the initial transfer occurs). See § 1.367(a)-8(c)(1)(i) and (v).

One of the gain recognition events enumerated is a failure to comply in any material respect with any requirement of the section 367(a) GRA regulations or with the terms of an existing GRA (failure to comply). See § 1.367(a)-8(j)(8). An example of such a failure to comply is the failure to file an annual certification. The section 367(a) GRA regulations provide that if there is a failure to comply, the U.S. transferor must recognize the full amount of gain realized on the initial transfer of stock or securities unless the U.S. transferor demonstrates that the failure was due to reasonable cause and not willful neglect under the procedure that is described in § 1.367(a)-8(p). Similarly, if there is a failure to timely file a GRA in connection with the initial transfer, the U.S. transferor must recognize gain with respect to the transfer unless the reasonable cause exception is satisfied.

In addition to the section 367(a) GRA regulations, other regulations under section 367(a) require certain other statements to be filed in connection with a transfer of stock or securities by a U.S. person to a foreign corporation. A domestic target corporation in certain cases must file statements in connection with the transfer by its shareholders or security holders of stock or securities in the domestic target corporation to a foreign corporation under § 1.367(a)-3(c). See § 1.367(a)-3(c)(6) and (7). Also, a domestic target corporation must file a statement when its assets are transferred to a foreign acquiring corporation in a section 361 exchange and all or a portion of those assets are subsequently transferred to a domestic subsidiary of the foreign acquiring corporation in a transaction treated as an indirect stock transfer under § 1.367(a)-3(d). See § 1.367(a)-3(d)(2)(vi)(B)(1)(ii).

In addition, a U.S. person who transfers certain property to a foreign corporation in certain nonrecognition transactions is subject to the reporting requirements of section 6038B and the regulations. See §§ 1.6038B-1 and -1T. In general, the U.S. transferor must file IRS Form 926 “Return by a U.S. Transferor of Property to a Foreign Corporation,” identifying the transferee foreign corporation and describing the property transferred. The penalty for failure to satisfy the section 6038B reporting requirement is equal to ten percent of the fair market value of the property at the time of the exchange, but not to exceed $100,000 unless the failure was due to intentional disregard of the reporting obligation. If, however, the U.S. transferor demonstrates that the failure was due to reasonable cause and not willful neglect, no penalty is imposed.

Section 1.6038B-1T(c)(4)(ii) provides that if stock or securities are transferred, the U.S. transferor must provide information about the stock or securities on Form 926. Section 1.6038B-1(f)(2)(i) provides that a failure to comply with the reporting requirements of the regulations includes the failure to provide material information about the property transferred. Thus, the failure to provide the required information about the stock or securities transferred could result in a section 6038B penalty. The current section 6038B regulations have a rule coordinating the obligations to file a GRA and complete Form 926. Specifically, § 1.6038B-1(b)(2) relieves a U.S. transferor of the obligation to report a transfer of stock or securities on Form 926 and from the section 6038B penalty if the U.S transferor has properly filed a GRA.

On the other hand, a U.S. transferor who transfers stock or securities for which a GRA must be properly filed to avoid recognizing gain under section 367(a)(1) and who neither properly files a GRA nor a Form 926 with respect to the transfer is potentially subject both to the penalty under section 6038B and full gain recognition under section 367(a)(1). Both of these provisions have a reasonable cause exception for a failure to file, and a U.S. transferor who cannot establish reasonable cause is subject to both provisions.

The Deficit Reduction Act of 1984 (1984 Act) (Public Law 98-369, 98 Stat 494 (1984)) amended section 367(a) and enacted section 6038B. The legislative history to the 1984 Act indicates that Congress intended sections 367 and 6038B to operate in tandem, with section 6038B serving as a notification requirement for transfers under section 367(a). H.R. Rep. No. 432, Pt. 2, 98th Cong., 2d Sess., March 5, 1984 at 1325; S. Rep. No. 169, Vol. 1, 98th Cong., 2d Sess., Apr. 2, 1984 at 370.

Temporary regulations were published on May 16, 1986 (TD 8087, 1986-1 CB 175, 51 FR 17936), addressing GRAs and reporting under section 6038B (1986 temporary regulations). The 1986 temporary regulations imposed both full gain recognition under section 367(a)(1) for failure to comply with the regulations under section 367(a) as well as the penalty under section 6038B for failure to comply with the section 6038B reporting requirements. Both rules have been retained in later-issued guidance under sections 367(a) and 6038B.

In addition, the current final regulations under § 1.367(a)-8(p)(1) allow a U.S. transferor to obtain relief from gain recognition caused by a failure to file a GRA or a failure to comply in any material respect with the regulations by requesting relief and establishing that a failure to file or comply was due to reasonable cause and not willful neglect. When a U.S. transferor requests relief from full gain recognition under this section, the regulations provide that the appropriate IRS examination official (Director) shall notify the U.S. transferor in writing if it is determined that the U.S. transferor's failure was not due to reasonable cause, or if additional time will be needed to make a determination. This notification is to be made within the 120-day period that begins on the date that the IRS notifies the U.S. transferor in writing that its request for relief has been received and assigned for review. If the U.S. transferor is not so notified before the close of this 120-day period, the U.S. transferor is deemed to have established that the failure to file or failure to comply was due to reasonable cause and not willful neglect.

B. Section 367(e)(2)

Section 367(e)(2) provides generally that in a liquidation to which section 332 applies, except as provided in regulations, subsections (a) and (b)(1) of section 337 shall not apply when the 80-percent distributee (as defined in section 337(c)) is a foreign corporation. As a result, if a domestic liquidating corporation liquidates into a foreign parent corporation (an outbound liquidation), or if a foreign liquidating corporation liquidates into a foreign parent corporation (a foreign-to-foreign liquidation), the liquidating corporation generally must recognize gain or loss on the distribution as if such property were sold to the distributee at its fair market value. Section 1.367(e)-2(b)(1) provides that a domestic liquidating corporation must recognize gain or loss on an outbound liquidation, subject to an overall loss limitation, except to the extent it satisfies one of the exceptions provided under § 1.367(e)-2(b)(2). These exceptions are for distributions of: (i) Property used in the conduct of a trade or business in the United States (a U.S. trade or business); (ii) a U.S. real property interest; or (iii) stock of a domestic subsidiary corporation that is at least 80-percent owned by the domestic liquidating corporation.

The regulations also address foreign-to-foreign liquidations and provide that a foreign liquidating corporation generally is not required to recognize gain or loss on the distribution, except in the case of certain distributions of property used in a U.S. trade or business or formerly used in a U.S. trade or business. See § 1.367(e)-2(c).

Other than the exception for a distribution of a U.S. real property interest, the exceptions provided under § 1.367(e)-2 require the filing of certain statements or schedules by the liquidating corporation and the distributee corporation. In addition, a domestic liquidating corporation that distributes property to a foreign corporation in a transaction subject to section 367(e)(2) must file a Form 926 with respect to the distribution. See § 1.6038B-1(e).

Explanation of Provisions

A. Proposed Amendments to the Section 367(a) GRA Regulations

Under current law, if a U.S. transferor fails to timely file an initial GRA, or fails to comply in any material respect with the section 367(a) GRA regulations with respect to an existing GRA (for example, because it fails to timely file an annual certification), the U.S. transferor is subject to full gain recognition under section 367(a)(1) unless the U.S. transferor later discovers the failure, promptly files the GRA or other required information with the IRS, and demonstrates that its failure was due to reasonable cause and not willful neglect. The existing reasonable cause standard, given its interpretation under the case law, may not be satisfied by U.S. transferors in many common situations even though the failure was not intentional and not due to willful neglect. Based on the current operation of the section 367(a) GRA regulations, the Internal Revenue Service (IRS) and the Department of the Treasury (Treasury Department) believe that full gain recognition under section 367(a)(1) should apply only if a failure to timely file an initial GRA or a failure to comply with the section 367(a) GRA regulations with respect to an existing GRA is willful. The IRS and the Treasury Department believe that the penalty imposed by section 6038B generally should be sufficient to encourage proper reporting and compliance.

Accordingly, the proposed regulations would revise the section 367(a) GRA regulations to provide that a U.S. transferor seeking either to (i) avoid recognizing gain under section 367(a)(1) on the initial transfer as a result of a failure to timely file an initial GRA, or (ii) avoid triggering gain as a result of a failure to comply in all material respects with the section 367(a) GRA regulations or the terms of an existing GRA, must demonstrate that the failure was not a willful failure. For this purpose, willful is to be interpreted consistent with the meaning of that term in the context of other civil penalties (for example, section 6672), which would include a failure due to gross negligence, reckless disregard, or willful neglect.

Whether a failure is willful will be determined based on all the relevant facts and circumstances. The proposed regulations illustrate the application of this standard through a series of examples. For example, the section 367(a) GRA regulations require a GRA to include information about the adjusted basis and fair market value of the property transferred. Filing a GRA and intentionally not providing such information, including noting on the GRA that this information is “available upon request,” would be a willful failure.

In addition, the proposed regulations modify the process through which requests for relief from a failure to file or a failure to comply are evaluated by eliminating the requirement for the IRS to respond to such relief requests within 120 days. While the IRS is committed to processing requests promptly, the IRS and the Treasury Department do not believe that the IRS's processing time with respect to a relief request should be determinative of whether a U.S. transferor has satisfied its obligations under the section 367(a) GRA regulations.

The proposed regulations also provide guidance clarifying when an initial GRA is considered timely filed, and what gives rise to a failure to comply in any material respect with the requirements of the section 367(a) GRA regulations or the terms of an existing GRA. In general, an initial GRA is timely filed only if each document that is required to be filed as part of an initial GRA is timely filed and completed in all material respects. Similarly, in general, there is a failure to comply in a material respect with the section 367(a) GRA regulations or the terms of an existing GRA if a document (such as an annual certification) that is required to be filed is not timely filed, or is not completed in all material respects. The examples provided in the proposed regulations also illustrate the application of the “completed in all material respects” requirement of the current final regulations.

The proposed regulations also clarify that the section 6038B penalty will apply to a failure to comply in any material respect with the section 367(a) GRA regulations or the terms of an existing GRA, such as a failure to properly file a gain recognition agreement document (including an annual certification or new GRA). Under the proposed regulations, a failure to comply has the same meaning for purposes of the section 367(a) GRA regulations and the section 6038B regulations; however, the current reasonable cause standard continues to apply to U.S. transferors seeking relief from the section 6038B penalty.

In addition, the section 6038B penalty continues to apply, as provided under the current section 6038B regulations, if both a Form 926 is not filed with respect to the initial transfer and there is a failure to file an initial GRA. In this case, the current reasonable cause standard continues to apply to U.S. transferors seeking relief from the section 6038B penalty.

The proposed regulations modify the information that must be reported with respect to a transfer of stock or securities on Form 926. Specifically, the U.S. transferor must include on Form 926 the basis and fair market value of the property transferred. Finally, the proposed regulations require that a Form 926 be filed in all cases in which a GRA is filed, but provide that only Part I and Part II of the Form 926 must be completed if the only asset transferred is stock or securities.

B. Proposed Amendments to the Section 367(e)(2) Regulations

The section 367(e)(2) regulations governing liquidating distributions to foreign parent corporations contain several rules that condition nonrecognition treatment upon the timely filing of statements or other documents, or complying with the requirements of those regulations. These documents are functionally similar to GRAs in certain respects. The current section 367(e)(2) regulations provide no explicit guidance regarding the treatment of taxpayers who fail to file these documents or report the required information, and also provide no mechanism to obtain relief for such failures. As discussed in this preamble, the section 6038B regulations also require that a Form 926 be filed with respect to liquidating distributions by a domestic corporation to a foreign parent corporation.

The IRS and the Treasury Department believe that the changes made by the proposed regulations in the case of section 367(a) transfers are also appropriate for failures to file or failures to comply for purposes of the section 367(e)(2) regulations and the related section 6038B regulations. Accordingly, the proposed regulations provide rules similar to the rules under the section 367(a) GRA regulations and related section 6038B regulations for failures to file the required documents or statements and failures to comply under the section 367(e)(2) regulations and related section 6038B regulations. Finally, the proposed regulations modify the information that must be reported with respect to one or more liquidating distributions of property, including the addition of the requirement to report the basis and fair market value of the property distributed.

C. Other Reporting Under Section 1.367(a)-3

The section 367(a) regulations currently do not address a taxpayer's failure to file certain other statements required under § 1.367(a)-3 in connection with certain transfers of stock or securities. These include the statements required to be filed by a domestic target corporation in connection with a transfer of stock or securities of such corporation to a foreign corporation as described in §§ 1.367(a)-3(c)(6) and (7), and the statement required to be filed by a domestic target corporation in connection with the transfer of its assets to a foreign corporation in an exchange described in section 361 and the subsequent transfer of those assets to a domestic subsidiary in a transaction described in § 1.367(a)-3(d)(2)(vi)(B)(1)(ii). The IRS and the Treasury Department believe that failures to timely file these statements or failures to comply in all material respects with these regulations should be treated similarly to failures to file or failures to comply with the section 367(a) GRA regulations. Accordingly, these proposed regulations incorporate similar rules with respect to these other filing obligations.

Proposed Effective/Applicability Date

These regulations are proposed to apply with respect to documents or statements required under the section 367(a) GRA regulations, § 1.367(a)-3(c) or (d) of the regulations, or the section 367(e) regulations that are required to be filed with a timely filed return on or after the date that final regulations are published in the Federal Register, as well as with respect to any requests for relief for failures to file documents and statements required under these regulations, or failures to comply, if such requests are submitted on or after the date that final regulations are published in the Federal Register.

Special Analyses

It has been determined that this proposed regulation is not a significant regulatory action as defined in Executive Order 12866, as supplemented by Executive Order 13563. Therefore, a regulatory assessment is not required. It also has been determined that section 553(b) of the Administrative Procedure Act (5 U.S.C. chapter 5) does not apply to these regulations. It is hereby certified that these regulations will not have a significant impact on a substantial number of small entities. This certification is based on the fact that these regulations merely provide for a change in the standard, or clarify or provide the standard, that will be used to determine whether a taxpayer that has failed to file, or comply with the terms of, a gain recognition agreement or other related document, a § 1.367(a)-3 statement, or a document or statement required under § 1.367(e)-2 will be entitled to avoid full gain recognition under section 367(a)(1) or 367(e)(2), as applicable. Accordingly a Regulatory Flexibility Analysis under the Regulatory Flexibility Act (5 U.S.C. chapter 6) is not required. Pursuant to section 7805(f) of the Code, these regulations have been submitted to the Chief Counsel for Advocacy of the Small Business Administration for comment on their impact on small business.

Comments and Requests for Public Hearing

Before these proposed regulations are adopted as final regulations, consideration will be given to any written comments (a signed original and eight (8) copies) or electronic comments that are submitted timely to the IRS. The IRS and the Treasury Department request comments on the clarity of the proposed regulations and how they may be made easier to understand. All comments will be available for public inspection and copying. A public hearing may be scheduled if requested in writing by any person who timely submits written or electronic comments. If a public hearing is scheduled, notice of the date, time, and place of the hearing will be published in the Federal Register.

Drafting Information

The principal author of these proposed regulations is Mary W. Lyons of the Office of Associate Chief Counsel (International). However, other personnel from the IRS and the Treasury Department participated in their development.

List of Subjects in 26 CFR Part 1

• Income taxes
• Reporting and recordkeeping requirements

Proposed Amendments to the Regulations

Accordingly, 26 CFR part 1 is proposed to be amended as follows:

PART 1—INCOME TAXES

Paragraph 1. The authority citation for part 1 continues to read in part as follows:

Authority: 26 U.S.C. 7805 * * *

Par. 2. Section 1.367(a)-3 is amended:

1. By revising paragraph (c)(6)(ii).

2. In paragraph (d)(2)(vi)(B)( 1)(ii) by removing the language “its U.S. income tax return” and adding the language “its timely filed U.S. income tax return” in its place.

3. By adding paragraph (f).

4. By adding paragraph (g)(1)(ix).

The additions and revisions read as follows:

Par. 3. Section 1.367(a)-8 is amended:

1. By revising the eleventh sentence of paragraph (a).

2. In paragraph (b)(1) by

a. Redesignating definitions (xii) through (xv) as (xiv) through (xvii).

b. Redesignating definition (xi) as (xiii).

c. Redesignating definitions (v) through (x) as (vii) through (xii).

d. Redesignating definition (iv) as (v).

e. Adding new definitions (iv) and (vi).

f. Revising redesignated definitions (xiii), (xiv), and (xv).

3. By revising paragraph (d)(1).

4. By revising paragraph (j)(8).

5. By revising paragraph (p).

6. By adding a sentence at the end of paragraph (r)(1)(i).

The revisions and addition read as follows:

Par. 4. Section 1.367(e)-2 is amended:

1. By revising the ninth sentence and adding two new sentences before the last sentence of paragraph (a).

2. By revising paragraph (b)(1)(i).

3. In paragraph (b)(2)(i)(A)( 2) by removing the language “its U.S. income tax returns” and adding the language “its timely filed U.S. income tax returns” in its place.

4. In paragraph (b)(2)(i)(A)( 3) by removing the language “its U.S. income tax return” and adding the language “its timely filed U.S. income tax return” in its place.

5. In the first sentence of paragraph (b)(2)(i)(E)( 3) by removing the language “its U.S. income tax return” and adding the language “its timely filed U.S. income tax return” in its place.

6. In paragraph (b)(2)(i)(E)( 4)(ii) by removing the language “its U.S. income tax return” and adding the language “its timely filed U.S. income tax return” in its place.

7. In paragraph (b)(2)(i)(E)( 5)(ii) by removing the language “its U.S. income tax return” and adding the language “its timely filed U.S. income tax return” in its place.

8. In the first sentence of paragraph (b)(2)(iii)(A) by removing the language “its U.S. income tax return” and adding the language “its timely filed U.S. income tax return” in its place.

9. In paragraph (c)(2)(i)(B)( 3) by removing the language “their U.S. income tax returns” and adding the language “their timely filed U.S. income tax returns” in its place.

10. By revising paragraph (e).

11. By adding paragraphs (f) and (g).

The revisions and additions read as follows:

§ 1.367(e)-2. Distributions described in section 367(e)(2)—(a) Purpose and scope—(1) In general. * * * Paragraph (e) of this section provides rules regarding failures to file statements or other documents required under this section or failures to comply with the requirements of this section. Paragraph (f) of this section provides relief for certain failures to file or comply. Finally, paragraph (g) of this section specifies the effective/applicability date for the rules of this section. * * *

(b) Distribution by a domestic corporation—(1) General rule—(i) Recognition of gain and loss. If a domestic corporation (domestic liquidating corporation) makes a distribution of property in complete liquidation under section 332 to a foreign corporation (foreign distributee corporation) that meets the stock ownership requirements of section 332(b) with respect to stock in the domestic liquidating corporation, then—

(A) Pursuant to section 367(e)(2), section 337(a) and (b)(1) shall not apply; and

(B) The domestic liquidating corporation shall recognize gain or loss on the distribution of property to the foreign distributee corporation, except as provided in paragraph (b)(2) of this section.

(e) Failures to file or failures to comply—(1) Scope. This paragraph (e) provides rules regarding a failure to file an initial liquidation document with respect to one or more liquidating distributions by a domestic liquidating corporation that, absent such failure, would qualify for nonrecognition treatment under paragraph (b)(2)(i) or (iii) of this section, or with respect to one or more liquidating distributions by a foreign liquidating corporation that, absent such failure, would qualify for nonrecognition treatment under paragraph (c)(2)(i)(B) of this section (failure to file). This paragraph (e) also provides rules regarding failures to comply in all material respects with the terms of this section with respect to one or more liquidating distributions for which nonrecognition treatment was initially claimed under paragraph (b)(2)(i), (b)(2)(iii), or (c)(2)(i)(B) of this section, as applicable (failure to comply).

(2) Definitions. The following definitions apply for purposes of this section.

(i) An initial liquidation document means any statement, schedule, or form required to be filed under this section in order for the domestic liquidating corporation or foreign liquidating corporation, as applicable, to initially qualify to claim nonrecognition treatment with respect to one or more liquidating distributions described in this section, including—

(A) The statement and attachments described in paragraph (b)(2)(i)(C) of this section;

(B) The statement described in paragraph (b)(2)(iii)(D) of this section; and

(C) The statement and attachments described in paragraph (c)(2)(i)(C) of this section.

(ii) A subsequent liquidation document means any statement, schedule, or form (other than an initial liquidation document) required to be filed under this section in order for the domestic liquidating corporation or foreign liquidating corporation, as applicable, to continue to qualify for nonrecognition treatment with respect to one or more liquidating distributions described in this section, including—

(A) The schedule described in paragraph (b)(2)(i)(E)(3) of this section;

(B) The schedule described in paragraph (b)(2)(i)(E)(4)(ii) of this section; and

(C) The statement and attachments described in paragraph (b)(2)(i)(E)(5) of this section.

(iii) A timely filed U.S. income tax return means a Federal income tax return filed by the due date set forth in section 6072, plus any extension of time to file such return granted under section 6081.

(3) Failure to file—(i) General rule. For purposes of this section and except as provided in paragraph (e)(5) or (f) of this section, there is a failure to file an initial liquidation document if—

(A) An initial liquidation document is not filed with the timely filed U.S. income tax return specified under this section, or

(B) An initial liquidation document is not completed in all material respects.

(ii) Consequences of a failure to file. If there is a failure to file an initial liquidation document, then nonrecognition treatment under paragraph (b)(2)(i), (b)(2)(iii), or (c)(2)(i)(B) of this section (as appropriate) will not apply.

(4) Failure to comply—(i) General rule. For purpose of this section and except as provided in paragraph (e)(5) or (f) of this section, a failure to comply includes—

(A) A failure to report gain, or pay any additional tax or interest due, in accordance with the requirements under this section; and

(B) A failure to file a subsequent liquidation document, as determined applying paragraph (e)(3)(i) of this section, but replacing the term “initial liquidation document” with the term “subsequent liquidation document.”

(ii) Consequences of a failure to comply. If there is a failure to comply in any material respect with the terms of paragraph (b)(2)(i), (b)(2)(iii), or (c)(2)(i) of this section, as applicable, then—

(A) Any gain (but not loss) that was not previously recognized by the domestic liquidating corporation or foreign liquidating corporation, as applicable, under paragraph (b)(2)(i), (b)(2)(iii), or (c)(2)(i)(B) of this section must be recognized; and

(B) The period of limitations on assessment of tax is extended until the close of the third full taxable year ending after the date on which the Director of Field Operations International, Large Business & International (or any successor to the roles and responsibilities of such position, as appropriate) (Director) is provided written notification that specifically references the failure to comply, or a tax return is filed reporting the gain that was not recognized by the domestic liquidating corporation or the foreign liquidating corporation, as applicable, by reason of paragraph (b)(2)(i), (b)(2)(iii), or (c)(2)(i)(B) of this section.

(f) Relief for certain failures to file or failures to comply that are not willful—(1) In general. This paragraph (f) provides relief if there is a failure to file an initial liquidation document as described in paragraph (e)(3)(i) of this section (failure to file), or a failure to comply in any material respect with the terms of this section as described in paragraph (e)(4)(i) of this section (failure to comply), respectively. The failure to file or a failure to comply, as applicable, is deemed not to have occurred for purposes of paragraph (e)(3)(ii) or (e)(4)(ii) of this section if the taxpayer is able to demonstrate that the failure was not willful using the procedure set forth in this paragraph (f). For this purpose, willful is to be interpreted consistent with the meaning of that term in the context of other civil penalties, which would include a failure due to gross negligence, reckless disregard, or willful neglect. Whether a failure to file or failure to comply, as applicable, was willful will be determined by the Director based on all the facts and circumstances.

The taxpayer shall submit a request for relief and an explanation as provided in paragraph (f)(2)(i) of this section. Although a taxpayer whose failure to file or failure to comply, as applicable, is determined not to be willful will avoid gain or loss recognition under this section, the taxpayer will be subject to a penalty under section 6038B if the taxpayer fails to satisfy the reporting requirements under that section and does not demonstrate that the failure was due to reasonable cause and not willful neglect. See § 1.6038B-1(e)(4) and (f). The determination of whether the failure to file or failure to comply was willful under this section has no effect on any request for relief made under § 1.6038B-1(f).

(2) Procedures for establishing that a failure to file or comply was not willful—(i) Time of submission. A taxpayer's statement that the failure to file or failure to comply, as applicable, was not willful will be considered only if, promptly after the taxpayer becomes aware of the failure, an amended return is filed for the taxable year to which the failure relates that includes the information that should have been included with the original return for such taxable year or that otherwise complies with the rules of this section, and that includes a written statement explaining the reasons for the failure. In the case of a liquidating distribution described in paragraph (b)(2)(i) or (c)(2)(i)(B) of this section, the taxpayer must file, with the amended return, a Form 8838 extending the period of limitations on the assessment of tax with respect to the gain realized but not recognized with respect to the liquidating distribution to the later of the date provided in paragraph (b)(2)(i)(C)(5), taking into account paragraph (c)(2)(i)(C) and (D), as applicable, or three years from the date the required information is provided to, or the required gain or loss is reported to, as applicable, the IRS. In the case of a liquidating distribution described in paragraph (b)(2)(iii) of this section, the taxpayer must file, with the amended return, a Form 8838 extending the period of limitations on assessment of tax with respect to the gain realized but not recognized with respect to the liquidating distribution to three years from the date the required information is provided to the IRS, or the required gain or loss is reported to the IRS. The amended return and Form 8838 must be filed with the applicable Internal Revenue Service Center with which the taxpayer filed its original return for such taxable year. The taxpayer may also submit a request for relief from the penalty of section 6038B as part of the same submission.

(ii) Notice requirement. In addition to the requirements of paragraph (f)(2)(i) of this section, the taxpayer must comply with the notice requirements of this paragraph (f)(2)(ii). If any taxable year of the taxpayer is under examination when the amended return is filed, a copy of the amended return and any information required to be included with such return must be delivered to the Internal Revenue Service personnel conducting the examination. If no taxable year of the taxpayer is under examination when the amended return is filed, a copy of the amended return and any information required to be included with such return must be delivered to the Director.

(3) For an illustration of the application of the willfulness standard, see the examples in § 1.367(a)-8(p)(3).

(g) Effective/applicability dates. The ninth, tenth, and eleventh sentences of paragraph (a) of this section, and paragraphs (b)(1)(i), (b)(2)(i)(A)(2), (b)(2)(i)(A)(3), (b)(2)(i)(E)(3), (b)(2)(i)(E)(4)(ii), (b)(2)(i)(E)(5)(ii), (b)(2)(iii)(A), (c)(2)(i)(B)(3), (e), and (f) of this section will apply to liquidation documents that are required to be filed with a timely filed U.S. income tax return on or after the date of publication of the Treasury decision adopting these rules as final regulations in the Federal Register, as well as to any requests for relief for failures to file liquidation documents, or failures to comply, if such requests are submitted on or after the date of publication of the Treasury decision adopting these rules as final regulations in the Federal Register.

Par. 5. Section 1.6038B-1 is amended by:

1. Adding a sentence after the first sentence in paragraph (b)(1)(i).

2. Revising paragraph (b)(2)(i)(B)( 1).

3. Adding paragraph (b)(2)(iii).

4. Adding paragraph (b)(2)(iv).

5. Revising paragraph (c).

6. Revising paragraph (e)(4).

7. Adding paragraph (f)(2)(iii).

8. Adding paragraph (f)(2)(iv).

9. Adding paragraph (g)(5).

The revisions and additions read as follows: