Par. 9. Sections 1.56A-0 through 1.56A-27 are added to read as follows:
(a) Overview. This section provides rules under section 56A(c)(2)(C) and (c)(15)(B) of the Code for determining the AFSI, CAMT basis, and CAMT earnings consequences of certain corporate reorganizations with respect to which a domestic corporate CAMT entity and an individual or other CAMT entity, including a CAMT entity that is a shareholder of a domestic corporate CAMT entity, is a party, and section 351 exchanges. This section incorporates the definitions in § 1.56A-18. Paragraph (b) of this section provides rules for determining the CAMT consequences of B reorganizations. Paragraph (c) of this section provides rules for determining the CAMT consequences of certain acquisitive reorganizations. Paragraph (d) of this section provides rules for determining the CAMT consequences of section 355 transactions. Paragraph (e) of this section provides rules for determining the CAMT consequences of E reorganizations. Paragraph (f) of this section provides rules for determining the CAMT consequences of F reorganizations. Paragraph (g) of this section provides rules for determining the CAMT consequences of section 351 exchanges. Paragraph (h) of this section provides the applicability date of this section. For rules coordinating the application of this section with § 1.56A-4, see § 1.56A-18(a)(2)(ii).
(b) CAMT consequences of B reorganizations —(1) Target corporation shareholder or security holder in c overed nonrecognition transaction. If a target corporation shareholder or security holder transfers solely stock or securities to an acquiror corporation in a B reorganization that qualifies the target corporation shareholder or security holder for nonrecognition treatment under section 354 of the Code (that is, a covered nonrecognition transaction), the target corporation shareholder or security holder—
(i) Determines the target corporation shareholder's or security holder's AFSI resulting from the transfer by—
(A) Disregarding any resulting gain or loss reflected in the target corporation shareholder's or security holder's FSI; and
(B) Applying section 354 to the transfer (that is, no AFSI is recognized by the target corporation shareholder or security holder);
(ii) Determines the target corporation shareholder's or security holder's CAMT basis in the stock received from the acquiror corporation by applying section 358 of the Code using the CAMT basis (in lieu of AFS basis) of the stock or securities transferred by the target corporation shareholder or security holder to the acquiror corporation; and
(iii) Adjusts the target corporation shareholder's or security holder's CAMT current earnings (in lieu of AFS retained earnings) resulting from the covered nonrecognition transaction by applying section 312 of the Code.
(2) Target corporation shareholder or security holder in covered recognition transaction. If a target corporation shareholder or security holder receives stock or securities and other property (or solely property other than stock or securities) from an acquiror corporation in exchange for target corporation stock or securities (that is, in a transaction that fails to qualify as a B reorganization (a covered recognition transaction)), see, for example, § 1.56A-18(g), which provides rules for determining the CAMT consequences of stock sales, and paragraph (g) of this section, which provides rules for determining the CAMT consequences of section 351(b) transactions.
(3) Acquiror corporation in covered nonrecognition transaction. If an acquiror corporation transfers solely stock to a target corporation shareholder as part of a B reorganization that qualifies the acquiror corporation for nonrecognition treatment under section 1032(a) of the Code or section 1032(a) and § 1.1032-2(b) (that is, a covered nonrecognition transaction), the acquiror corporation—
(i) Determines the acquiror corporation's AFSI resulting from the covered nonrecognition transaction by—
(A) Disregarding any resulting gain or loss reflected in the acquiror corporation's FSI; and
(B) Applying section 1032(a), or section 1032(a) and § 1.1032-2(b) to the transfer (that is, no AFSI is recognized by the acquiror corporation);
(ii) Determines the acquiror corporation's CAMT basis in the stock received from a target corporation shareholder by applying section 362 of the Code using the CAMT basis (in lieu of AFS basis) of that stock in the hands of the target corporation shareholder; and
(iii) Adjusts the acquiror corporation's CAMT retained earnings (in lieu of AFS retained earnings) resulting from the covered nonrecognition transaction by applying section 312.
(4) Acquiror corporation in covered recognition transaction —(i) Failure to qualify as B reorganization. If an acquiror corporation transfers stock and other property (or solely property other than stock) to a target corporation shareholder described in paragraph (b)(1) of this section in exchange for target corporation stock (that is, a covered recognition transaction), paragraphs (b)(1) through (3) of this section do not apply. See § 1.56A-18(g), which provides rules for determining the CAMT consequences of stock sales, and paragraph (g) of this section, which provides rules for determining the CAMT consequences of section 351(b) transactions.
(ii) Failure to qualify under § 1.1032-2(b). If an acquiror corporation transfers solely stock of the acquiror corporation parent to a target corporation shareholder as part of a B reorganization that does not satisfy § 1.1032-2(b) with regard to all acquiror corporation parent stock (that is, a covered recognition transaction solely with regard to the acquiror corporation parent stock that does not satisfy § 1.1032-2(b)), then solely with regard to the acquiror corporation parent stock that does not qualify under § 1.1032-2(b), see § 1.56A-18(g), which provides rules for determining the CAMT consequences of stock sales.
(5) Acquiror corporation parent in covered nonrecognition transaction. If an acquiror corporation transfers solely stock of the acquiror corporation parent to a target corporation shareholder as part of a B reorganization that qualifies the acquiror corporation for nonrecognition treatment under section 1032(a) and § 1.1032-2(b) (that is, a covered nonrecognition transaction), the acquiror corporation parent adjusts its CAMT basis in its acquiror corporation stock pursuant to § 1.358-6.
(6) Acquiror corporation parent in covered recognition transaction —(i) Use of old and cold parent stock with qualifying B reorganization. If an acquiror corporation transfers solely stock of the acquiror corporation parent to a target corporation shareholder as part of a B reorganization that does not satisfy § 1.1032-2(b) with regard to all acquiror corporation parent stock (that is, a covered recognition transaction solely with regard to the acquiror corporation parent stock that does not satisfy § 1.1032-2(b)), the acquiror corporation parent adjusts its CAMT basis in its acquiror corporation stock pursuant to § 1.358-6.
(ii) Use of parent stock with transaction that does not qualify as a B reorganization. If an acquiror corporation transfers stock of the acquiror corporation parent and other property to a target corporation shareholder in exchange for target corporation stock (that is, a covered recognition transaction), with regard to all acquiror corporation parent stock transferred by the acquiror corporation, the acquiror corporation parent adjusts its CAMT basis in its acquiror corporation stock pursuant to § 1.1032-3.
(7) Examples. The following examples illustrate the application of the rules in this paragraph (b). For purposes of these examples, each entity is a domestic corporation that uses the calendar year as its taxable year and is not a member of a tax consolidated group.
(i) Example 1: Covered nonrecognition transaction —(A) Facts. During the taxable year, Acquiror acquires all the stock of Target from X for 100 shares of Acquiror's voting stock in a transaction that qualifies as a B reorganization. At the time of the transaction, X's stock in Target has a CAMT basis of $35× and a fair market value of $100× and Target has a CAMT basis of $30× in its assets.
(B) Analysis. Acquiror's acquisition of Target from X is a covered nonrecognition transaction to each of Acquiror and X. Under paragraph (b)(1)(i)(A) of this section, X disregards any FSI reflected in its AFS resulting from the exchange of Target stock for Acquiror stock. Under paragraph (b)(1)(i)(B) of this section, X records $0× in AFSI on the exchange. Under paragraph (b)(1)(ii) of this section, X takes the Acquiror stock received in the exchange with a CAMT basis of $35×. Under paragraph (b)(1)(iii) of this section, X adjusts its CAMT retained earnings by the amount of AFSI resulting from the exchange, or $0×. Under paragraph (b)(3)(i) of this section, Acquiror disregards any FSI reflected in its AFS resulting from the exchange of Acquiror stock for Target stock and under paragraph (b)(3)(i) of this section, Acquiror records $0× in AFSI on the exchange. Under paragraph (b)(3)(ii) of this section, Acquiror takes the Target stock with a $35× CAMT basis. Under paragraph (b)(3)(iii) of this section, Acquiror adjusts its CAMT retained earnings by the amount of AFSI resulting from the exchange, or $0×. Under § 1.56A-18(g)(2)(i), Target has no CAMT consequences from the transaction, and Target's $30× of CAMT basis in its assets is unaffected by the transaction.
(ii) Example 2: Covered recognition transaction. The facts are the same as in paragraph (b)(7)(i) of this section ( Example 1 ), except that Acquiror acquires the Target stock for 90 shares of Acquiror voting stock and 10 shares of Acquiror nonqualified preferred stock (within the meaning of section 351(g)). Under paragraph (b)(2) of this section, Acquiror's acquisition of Target from X is a covered recognition transaction. Under § 1.56A-18(g)(1)(i)(A), X disregards any FSI reflected in its AFS resulting from the transaction and uses its CAMT basis in the Target stock in determining its AFSI. As a result, X recognizes $65× of AFSI on the sale of the Target stock ($100 ×−$35× = $65×). Under § 1.56A-18(g)(2)(i), Target has no CAMT consequences from the transaction, and Target's $30× of CAMT basis in its assets is unaffected by the transaction. Under § 1.56A-18(g)(3)(ii), Acquiror takes a $100× CAMT basis in the stock of Target.
(c) CAMT consequences of certain acquisitive reorganizations —(1) Target corporation in a covered nonrecognition transaction— (i) Reorganization exchanges. If a target corporation transfers property to an acquiror corporation in an acquisitive reorganization that qualifies the target corporation solely for nonrecognition treatment under section 361 of the Code (that is, a covered nonrecognition transaction), the target corporation—
(A) Determines the target corporation's AFSI resulting from the transfer by disregarding any resulting gain or loss reflected in the target corporation's FSI and applying section 361(a) and (b) to the transfer (that is, no AFSI is recognized by the target corporation);
(B) Determines the target corporation's CAMT basis in the property received from the acquiror corporation by applying section 358 using the CAMT basis (in lieu of AFS basis) of the property transferred by the target corporation to the acquiror corporation; and
(C) Adjusts the target corporation's CAMT earnings (in lieu of AFS retained earnings) resulting from the covered nonrecognition transaction by applying section 312.
(ii) Section 361(c) distributions. As part of an acquisitive reorganization, if a target corporation distributes or transfers qualified property to a target corporation shareholder, or to a target corporation creditor, that qualifies solely for nonrecognition treatment to the target corporation under section 361(c), the target corporation determines its AFSI resulting from the transfer by—
(A) Disregarding any resulting gain or loss reflected in the target corporation's FSI; and
(B) Applying section 361(c) to the distribution (that is, no AFSI is recognized by the target corporation).
(2) Target corporation in covered recognition transaction. As part of an acquisitive reorganization, if a target corporation distributes or transfers property to a target corporation shareholder or security holder or target corporation creditor under section 361(c) that results in the recognition of gain to the target corporation (that is, a covered recognition transaction), the target corporation—
(i) Determines the target corporation's AFSI resulting from the distribution or transfer by redetermining any resulting gain or loss reflected in the target corporation's FSI by reference to its CAMT basis in the distributed or transferred property (in lieu of AFS basis); and
(ii) Adjusts the target corporation's CAMT earnings (in lieu of AFS retained earnings) based on the target corporation's AFSI, as determined under paragraph (c)(1)(ii)(A) of this section.
(3) Acquiror corporation qualification for covered nonrecognition transaction. If an acquiror corporation transfers solely stock, or stock and money or other property, to a target corporation as part of an acquisitive reorganization that qualifies the acquiror corporation for nonrecognition treatment under section 1032(a) or section 1032(a) and § 1.1032-2(b) (that is, a covered nonrecognition transaction), the acquiror corporation—
(i) Determines the acquiror corporation's AFSI resulting from the covered nonrecognition transaction by—
(A) Disregarding any resulting gain or loss reflected in the acquiror corporation's FSI; and
(B) Applying section 1032(a), or section 1032(a) and § 1.1032-2(b), to the transfer (that is, no AFSI is recognized by the acquiror corporation);
(ii) Determines the acquiror corporation's CAMT basis in the property received from the target corporation by applying section 362 using the CAMT basis (in lieu of AFS basis) of that property;
(iii) Adjusts the acquiror corporation's CAMT retained earnings (in lieu of AFS retained earnings) resulting from the covered nonrecognition transaction by applying sections 381(c)(2) and 312 of the Code; and
(iv) Applies section 381 to the target corporation's other attributes (that is, the acquiror corporation succeeds to the target corporation's other attributes).
(4) Acquiror corporation in covered recognition transaction —(i) Failure to qualify as an asset reorganization. If an acquiror corporation transfers stock and other property (or solely property other than stock) to a target corporation shareholder described in paragraph (b)(1) of this section in exchange for target corporation stock (that is, a covered recognition transaction), paragraphs (c)(1) through (3) of this section do not apply. See § 1.56A-18(h), which provides rules for determining the CAMT consequences of asset sales.
(ii) Failure to qualify under § 1.1032-2(b). If an acquiror corporation transfers solely stock of the acquiror corporation parent to a target corporation shareholder as part of an acquisitive reorganization that does not satisfy § 1.1032-2(b) with regard to all acquiror corporation parent stock (that is, a covered recognition transaction solely with regard to the acquiror corporation parent stock that does not satisfy § 1.1032-2(b)), then solely with regard to the acquiror corporation parent stock that does not qualify under § 1.1032-2(b), see § 1.56A-18(h), which provides rules for determining the CAMT consequences of asset sales.
(5) Acquiror corporation parent in covered nonrecognition transaction. If an acquiror corporation transfers solely stock of the acquiror corporation parent to a target corporation shareholder as part of an acquisitive reorganization that qualifies the acquiror corporation for nonrecognition treatment under section 1032(a) and § 1.1032-2(b) (that is, a covered nonrecognition transaction), the acquiror corporation parent adjusts its CAMT basis in its acquiror corporation stock pursuant to § 1.358-6.
(6) Acquiror corporation parent in covered recognition transaction— (i) Use of old and cold parent stock with qualifying acquisitive reorganization. If an acquiror corporation transfers solely stock of the acquiror corporation parent to a target corporation shareholder as part of an acquisitive reorganization that does not satisfy § 1.1032-2(b) with regard to all acquiror corporation parent stock (that is, a covered recognition transaction solely with regard to the acquiror corporation parent stock that does not satisfy § 1.1032-2(b)), the acquiror corporation parent adjusts its CAMT basis in its acquiror corporation stock pursuant to § 1.358-6.
(ii) Use of parent stock in a transaction that does not qualify as an acquisitive reorganization. If an acquiror corporation transfers acquiror corporation parent stock and other property to a target corporation shareholder in exchange for target corporation stock (that is, a covered recognition transaction), with regard to all acquiror corporation parent stock transferred by the acquiror corporation, the acquiror corporation parent adjusts its CAMT basis in its acquiror corporation stock pursuant to § 1.1032-3.
(7) Target corporation shareholder or security holder in covered nonrecognition transaction. A target corporation shareholder or security holder in a covered nonrecognition transaction described in paragraph (c)(1) of this section—
(i) Determines the target corporation shareholder or security holder's AFSI resulting from the covered nonrecognition transaction by—
(A) Disregarding any resulting gain or loss reflected in its FSI;
(B) Applying the relevant section of the Code (section 354 or 356 of the Code); and
(C) Using the distribution amount reflected on its AFS, taking into account (for purposes of the relevant section of the Code) the CAMT basis in its target corporation stock;
(ii) Determines the characterization of the distribution of property other than the acquiring corporation stock (to the extent applicable) by applying the relevant section of the Code based on the CAMT earnings (in lieu of earnings and profits) of the target corporation;
(iii) Determines its CAMT basis in the stock or securities of the acquiring corporation resulting from the distribution by applying the relevant section of the Code using the target corporation shareholder's or security holder's CAMT basis in the stock (in lieu of basis for regular tax purposes);
(iv) Determines its CAMT basis in the property received from the target corporation by applying the relevant section of the Code, using CAMT basis in lieu of AFS basis; and
(v) Adjusts (to the extent applicable) the target corporation shareholder's or security holder's CAMT current earnings (in lieu of AFS retained earnings) resulting from the distribution by applying section 312 based on its AFSI, as determined under paragraph (c)(4)(i) of this section.
(8) Examples. The following examples illustrate the application of the rules in this paragraph (c). For purposes of these examples, each entity is a domestic corporation that uses the calendar year as its taxable year and is not a member of a tax consolidated group.
(i) Example 1: Covered nonrecognition transaction —(A) Facts. During the taxable year, Target, whose stock is wholly owned by X, merges with and into Acquiror in a transaction that qualifies as a reorganization under section 368(a)(1)(A) of the Code. In the merger, X receives solely Acquiror stock with a fair market value of $100×. At the time of Target's merger into Acquiror, Target's assets have a CAMT basis of $15× and a value of $30×, Target has $10× CAMT retained earnings, and X has $40× of CAMT basis in its Target stock.
(B) Analysis. Acquiror's acquisition of Target's assets is a covered nonrecognition transaction. Under paragraph (c)(1)(i)(A) of this section, in computing AFSI resulting from the transaction, Target disregards any FSI reflected in its AFS resulting from the exchange of its assets for the Acquiror stock. Under paragraph (c)(3)(i)(A) of this section, Acquiror disregards any FSI reflected in its AFS resulting from the exchange of its stock for Target's assets, and instead applies section 1032(a) of the Code under paragraph (c)(3)(i)(B) of this section. Under paragraph (c)(3)(ii) of this section, Acquiror takes the Target assets with a CAMT basis of $15×. Under paragraph (c)(3)(iii) of this section, Acquiror adjusts its CAMT retained earnings to reflect Target's $10× CAMT retained earnings. Under paragraph (c)(7)(i) of this section, X disregards any FSI resulting from the exchange of its Target stock for Acquiror stock. Under paragraph (c)(7)(iii) of this section, X takes the Acquiror stock with a $40× CAMT basis.
(ii) Example 2: Covered nonrecognition transaction with nonqualifying consideration —(A) Facts. The facts are the same as in paragraph (c)(8)(i) of this section ( Example 1 ), except that X receives as consideration in the merger $10× cash and Acquiror voting stock with a fair market value of $90×.
(B) Analysis. The analysis is the same as in paragraph (c)(8)(i)(B) of this section ( Example 1 ), except as follows: Under paragraph (c)(7)(i)(B) of this section, X applies section 356 to the receipt of the $10× cash and includes $10× in AFSI. Under paragraph (c)(7)(iii) of this section, X takes the Acquiror stock at a $50× basis ($40× exchanged basis of Target stock + $10× gain recognized). Under paragraph (c)(7)(v) of this section, X adjusts its CAMT retained earnings to reflect the $10× AFSI recognized.
(d) CAMT consequences of section 355 transactions —(1) Distributing corporation in covered nonrecognition transactions —(i) Controlled contribution. If a distributing corporation transfers property to a controlled corporation in a transaction that qualifies the distributing corporation solely for nonrecognition treatment under sections 355 and 361 (that is, a covered nonrecognition transaction), the distributing corporation—
(A) Determines the distributing corporation's AFSI resulting from the one or more transfers by disregarding any resulting gain or loss reflected in its FSI and applying sections 355 and 361, respectively (that is, no AFSI is recognized by the distributing corporation);
(B) Determines the distributing corporation's CAMT basis in the property received from the controlled corporation by applying section 358 using the CAMT basis (in lieu of AFS basis) of the property transferred by the distributing corporation to the controlled corporation; and
(C) Adjusts the distributing corporation's CAMT earnings (in lieu of AFS retained earnings) resulting from the covered nonrecognition transaction by applying section 312.
(ii) Section 361(c) distributions and transfers. If a distributing corporation distributes or transfers solely qualified property to a distributing corporation shareholder or security holder, or to a creditor of the distributing corporation, that qualifies solely for nonrecognition treatment to the distributing corporation under section 361(c) (that is, a covered nonrecognition transaction), the distributing corporation determines the distributing corporation's AFSI resulting from the covered nonrecognition transaction by disregarding any resulting gain or loss reflected in the distributing corporation's FSI and applying section 361(c) (that is, no AFSI is recognized by the distributing corporation).
(iii) Section 355(c) distributions. If a distributing corporation distributes solely qualified property to a distributing corporation shareholder or security holder in a distribution that qualifies solely for nonrecognition treatment to the distributing corporation under section 355(c) (that is, a covered nonrecognition transaction), the distributing corporation—
(A) Determines the distributing corporation's AFSI resulting from the distribution by disregarding any resulting gain or loss reflected in the distributing corporation's FSI and applying section 355(c) (that is, no AFSI is recognized by the distributing corporation); and
(B) Adjusts the distributing corporation's CAMT earnings (in lieu of AFS retained earnings) resulting from the distribution by applying section 312.
(2) Distributing corporation in covered recognition transactions —(i) Controlled contribution. If a distributing corporation transfers property to a controlled corporation in a section 355 transaction that results in any recognition treatment to the distributing corporation (that is, a covered recognition transaction), the distributing corporation—
(A) Determines the distributing corporation's AFSI resulting from the one or more transfers by redetermining any resulting gain or loss reflected in its FSI by using CAMT basis in lieu of AFS basis;
(B) Determines the distributing corporation's CAMT basis in the property received from the controlled corporation to be equal to the distributing corporation's AFS basis in that property; and
(C) Adjusts the distributing corporation's CAMT retained earnings (in lieu of AFS retained earnings) based on the distributing corporation's AFSI, as determined under paragraph (d)(2)(i)(A) of this section.
(ii) Section 361(c) distribution. If a distribution or transfer of property by a distributing corporation under section 361(c) results in any recognition treatment to the distributing corporation (that is, a covered recognition transaction), the distributing corporation—
(A) Determines the distributing corporation's AFSI resulting from the covered recognition transaction by redetermining any resulting gain or loss reflected in the distributing corporation's FSI by reference to its CAMT basis in the distributed or transferred property (in lieu of AFS basis); and
(B) Adjusts the distributing corporation's CAMT earnings (in lieu of AFS retained earnings) based on the distributing corporation's AFSI, as determined under paragraph (d)(2)(ii)(A) of this section.
(3) Distributing corporation shareholder or security holder. A distributing corporation shareholder or security holder in a covered transaction described in paragraph (d)(1) or (2) of this section—
(i) Determines the distributing corporation shareholder's or security holder's AFSI resulting from the distribution by—
(A) Disregarding any resulting gain or loss reflected in the distributing corporation shareholder's or security holder's FSI;
(B) Applying the relevant section of the Code; and
(C) Using the distribution amount of the property other than distributing corporation stock reflected in the AFS of the distributing corporation shareholder or security holder, taking into account (for purposes of the relevant section of the Code) the CAMT basis of the distributing corporation shareholder or security holder in its distributing corporation stock;
(ii) Determines the characterization of the distribution of the property other than distributing corporation stock (to the extent applicable) by applying the relevant section of the Code based on the CAMT earnings (in lieu of earnings and profits) of the distributing corporation;
(iii) Determines the distributing corporation shareholder's or security holder's CAMT basis in the stock of the distributing corporation resulting from the distribution by applying the relevant section of the Code, using the CAMT basis of the distributing corporation shareholder or security holder in the stock (in lieu of basis for regular tax purposes);
(iv) Determines the distributing corporation shareholder's or security holder's CAMT basis in the property received from the distributing corporation by applying the relevant section of the Code, using CAMT basis (in lieu of AFS basis); and
(v) Adjusts the distributing corporation shareholder's or security holder's CAMT earnings (in lieu of AFS retained earnings) resulting from the distribution by applying section 312 based on its AFSI, as determined under paragraph (d)(3)(i) of this section.
(4) Controlled corporation in covered nonrecognition transaction. Subject to § 1.56A-18(e), if a controlled corporation transfers solely its own stock to a distributing corporation that qualifies the controlled corporation for nonrecognition treatment under section 1032(a) (that is, a covered nonrecognition transaction), the controlled corporation—
(i) Determines the controlled corporation's AFSI resulting from the transfer by—
(A) Disregarding any resulting gain or loss reflected in the controlled corporation's FSI; and
(B) Applying section 1032(a) to the transfer (that is, no AFSI is recognized by the controlled corporation);
(ii) Determines the controlled corporation's CAMT basis in the property received by the controlled corporation from the distributing corporation by applying section 362 using the CAMT basis (in lieu of AFS basis) of that property; and
(iii) Adjusts the controlled corporation's CAMT current earnings (in lieu of AFS retained earnings) resulting from the covered nonrecognition transaction by applying section 312.
(5) Controlled corporation in covered recognition transaction —(i) Qualification —(A) General rule. Except as provided in paragraph (d)(5)(i)(B) of this section, if a controlled corporation transfers money or other property (in addition to stock) to a distributing corporation as part of a section 355 transaction that qualifies the controlled corporation for nonrecognition treatment under section 1032(a), the transfer is treated as a covered recognition transaction to the controlled corporation.
(B) Exception for complete boot purges through covered nonrecognition transactions. A transfer by a controlled corporation described in paragraph (d)(5)(i)(A) of this section is treated as a covered nonrecognition transaction if the distributing corporation distributes or transfers all of the money or other property received by the distributing corporation in that transfer to a distributing corporation shareholder or security holder, or to a distributing corporation creditor, that qualifies solely for nonrecognition treatment to the distributing corporation under section 361(b) (that is, a covered nonrecognition transaction).
(ii) CAMT consequences. If a transfer by a controlled corporation described in paragraph (d)(5)(i) of this section is a covered recognition transaction, the controlled corporation—
(A) Determines the controlled corporation's AFSI resulting from the covered recognition transaction by redetermining any resulting gain or loss reflected in the controlled corporation's FSI by reference to the controlled corporation's CAMT basis (in lieu of AFS basis);
(B) Determines the controlled corporation's CAMT basis in the property received from the distributing corporation to be equal to the controlled corporation's AFS basis in that property; and
(C) Adjusts the controlled corporation's CAMT earnings (in lieu of AFS retained earnings) based on the controlled corporation's AFSI, as determined under paragraph (d)(5)(ii)(A) of this section.
(6) Examples. The following examples illustrate the application of the rules in this paragraph (d). For purposes of these examples, each entity is a domestic corporation that uses the calendar year as its taxable year and is not a member of a tax consolidated group.
(i) Example 1: Covered nonrecognition transaction to distributing corporation and controlled corporation —(A) Facts. On February 1, Distributing contributes property with a fair market value of $190x and a CAMT basis of $20x to Controlled, a newly formed corporation, in exchange for Controlled stock with a fair market value of $175x and $15x of Controlled securities (collectively, the Contribution). Pursuant to a plan of reorganization that includes the Contribution, Distributing distributes all of the Controlled stock to Distributing's shareholders in exchange for their Distributing stock (Controlled Split-Off) in a transaction that qualifies for Distributing under sections 368(a)(1)(D), 355, 357, and 361 of the Code, and for Controlled under section 1032(a). Pursuant to the plan of reorganization, Distributing distributes the Controlled securities to creditors of Distributing in transactions that qualify under section 361(c)(3) (Debt-for-Debt Exchange). Immediately before the Contribution, Distributing has $600x of CAMT retained earnings. As part of the Controlled Split-Off, X, a CAMT entity that holds 10 shares of Distributing stock with a CAMT basis of $10x and a fair market value of $26x, exchanges 5 shares of Distributing stock for Controlled stock. As part of the Debt-for-Debt Exchange, Y, a CAMT entity that holds Distributing securities with a CAMT basis of $3x and a fair market value of $6x, exchanges its Distributing securities for $6x of Controlled securities.
(B) Analysis: Contribution and distribution. The Contribution and the Controlled Split-Off are covered nonrecognition transactions. Under paragraph (d)(1)(i)(A) of this section, Distributing disregards any FSI reflected in its AFS resulting from the Contribution and instead applies section 361 to determine AFSI; that is, Distributing has $0x AFSI on the Contribution. Under paragraph (d)(1)(i)(B) of this section, Distributing takes a CAMT basis of $20x in the Controlled stock and securities received in the Contribution. Under paragraph (d)(1)(i)(C) of this section, Distributing reduces its CAMT earnings by the amount of AFSI resulting from the Contribution, or $0x. Under paragraph (d)(4)(i) of this section, Controlled disregards any FSI reflected in its AFS resulting from the Contribution and applies section 1032(a) to determine AFSI, or $0x AFSI resulting from the Contribution. Under paragraph (d)(4)(ii) of this section, Controlled records a CAMT basis of $20x for the assets received in the Contribution.
(C) Analysis: Distributing shareholders. Under paragraph (d)(3)(i)(A) of this section, X disregards any FSI reflected in its AFS resulting from the exchange of Distributing stock for Controlled stock and instead applies section 355(a) to determine AFSI, or $0x AFSI. Under paragraph (d)(3)(iii) of this section, X takes a $5x CAMT basis in the Controlled stock received in the Controlled Split-Off. Under paragraph (d)(3)(v) of this section, X adjusts its CAMT retained earnings by the amount of AFSI resulting from the exchange, or $0x.
(D) Analysis: Distributing security holders. The analysis is similar to paragraph (d)(6)(i)(C) of this section ( Example 1 ) for Y with respect to the Controlled securities exchanged for Distributing securities.
(ii) Example 2: Distributing corporation boot-purge exception —(A) Facts. The facts are the same as in paragraph (d)(6)(i)(A) of this section ( Example 1 ), except that in the Contribution, the property contributed to Controlled has a fair market value of $200x, Controlled transfers $10x cash to Distributing, and Distributing distributes the $10x cash to its shareholders in a distribution that qualifies under section 361(b)(1)(A) (Cash Distribution). In the Cash Distribution, X receives $1x.
(B) Analysis. Because the Cash Distribution qualifies under section 361(b)(1)(A), under paragraph (d)(5)(i)(B) of this section, the receipt of nonqualifying consideration and the distribution of nonqualifying consideration is a covered nonrecognition transaction. As a result, the analysis is the same as paragraph (d)(6)(i)(B) of this section ( Example 1 ). Additionally, under paragraph (d)(3)(i)(B) of this section, X includes $1x in AFSI. Under paragraph (d)(3)(v) of this section, X adjusts its CAMT earnings by the amount of AFSI resulting from the exchange, or $1x.
(iii) Example 3: Covered recognition transaction to distributing corporation —(A) Facts. The facts are the same as in paragraph (d)(6)(ii)(A) of this section ( Example 2 ), except that in the Contribution, the fair market value of the property contributed to Controlled is $210x and Distributing receives Controlled securities worth $25x and distributes all of the Controlled securities to Distributing creditors in exchange for Distributing securities. Additionally, in the Controlled Split-Off, Distributing distributes only 90% of the Controlled stock. On September 30th, Distributing distributes the remaining 10% of the Controlled stock pro rata to its shareholders.
(B) Analysis: Contribution. Because Distributing distributed Controlled securities with a fair market value of more than the adjusted basis of the property transferred to Controlled, resulting in gain to Distributing under section 361(b)(3), under paragraph (d)(2)(i) of this section, the Contribution is a covered recognition transaction. Under paragraph (d)(2)(i)(A) of this section, Distributing determines its AFSI resulting from the exchange using its CAMT basis, or $190x ($210x−$20x). Under paragraph (d)(2)(i)(B) of this section, Distributing's CAMT basis in the Controlled stock and Controlled securities is its AFS basis, or $170x and $25x, respectively. Under paragraph (d)(2)(i)(C) of this section, Distributing adjusts its CAMT retained earnings by the amount of AFSI resulting from the Contribution, or $190x.
(C) Analysis: Controlled split-off. The Controlled Split-Off is a covered nonrecognition transaction. As a result, the analysis of the CAMT consequences to X is similar to paragraph (d)(6)(i)(C) of this section ( Example 1 ). Under § 1.56A-18(c)(2)(i), Distributing disregards any FSI reflected in its AFS resulting from the Controlled Split-Off. Additionally, under § 1.56A-18(c)(2)(i), Distributing disregards any FSI reflected in its AFS resulting from any mark-to-market of the fair value of the retained Controlled stock.
(D) Analysis — Debt-for-debt exchange. The Debt-for-Debt exchange is a covered nonrecognition transaction. As a result, the analysis with respect to Y is similar to paragraph (d)(6)(i)(D) of this section ( Example 1 ).
(e) CAMT consequences of recapitalizations —(1) Recapitalizing corporation in covered nonrecognition transaction. If a recapitalizing corporation transfers solely stock to a recapitalizing corporation shareholder or creditor in an E reorganization or a section 1036 exchange that qualifies the recapitalizing corporation solely for nonrecognition treatment (that is, a covered nonrecognition transaction), the recapitalizing corporation—
(i) Determines the recapitalizing corporation's AFSI resulting from the covered nonrecognition transaction by—
(A) Disregarding any resulting gain or loss reflected in the recapitalizing corporation's FSI; and
(B) Applying section 1032(a) or 1036 of the Code, as appropriate (that is, no AFSI is recognized by the recapitalizing corporation); and
(ii) Adjusts the recapitalizing corporation's CAMT earnings (in lieu of AFS retained earnings) resulting from the covered nonrecognition transaction by applying section 312.
(2) Component transactions consisting of covered nonrecognition transaction and corporate distributions. If a transaction that qualifies as an E reorganization includes a transfer of money or other property (other than stock in the recapitalizing corporation) to a recapitalizing corporation shareholder or security holder, the recapitalizing corporation determines its aggregate resulting AFSI and CAMT earnings by treating each of the following component transactions separately—
(i) Each component transaction that qualifies as a covered nonrecognition transaction; and
(ii) Each component transaction that is treated as a distribution of property by the recapitalizing corporation to a recapitalizing corporation shareholder or security holder. See paragraph (d)(1)(ii) of this section for rules addressing non-liquidating corporate distributions.
(3) Recapitalizing corporation shareholder or security holder. A recapitalizing corporation shareholder or security holder in a covered transaction described in paragraph (e)(1) or (2) of this section—
(i) Determines the recapitalizing corporation shareholder's or security holder's AFSI resulting from the covered transaction by—
(A) Disregarding any resulting gain or loss reflected in its FSI;
(B) Applying the relevant section of the Code; and
(C) Using the distribution amount reflected on its AFS, taking into account (for purposes of the relevant section of the Code) the CAMT basis in its recapitalizing corporation stock;
(ii) Determines the characterization of any distribution (to the extent applicable) by applying the relevant section of the Code based on the CAMT earnings (in lieu of earnings and profits) of the recapitalizing corporation;
(iii) Determines its CAMT basis in the stock of the recapitalizing corporation resulting from the exchange by applying the relevant section of the Code using its CAMT basis in the stock (in lieu of basis for regular tax purposes);
(iv) Determines its CAMT basis in the property received from the recapitalizing corporation by applying the relevant section of the Code, using CAMT basis (in lieu of AFS basis); and
(v) Adjusts (to the extent applicable) its CAMT earnings (in lieu of AFS retained earnings) resulting from the exchange by applying section 312 based on its AFSI, as determined under paragraph (e)(3)(i) of this section.
(4) Examples. The following examples illustrate the application of the rules in this paragraph (e). For purposes of these examples, each entity is a domestic corporation that uses the calendar year as its taxable year and is not a member of a tax consolidated group.
(i) Example 1: Covered nonrecognition transaction —(A) Facts. X has two classes of common stock, Class D and Class E. X also has issued $100x in securities that are held by unrelated parties. On its AFS, X carries the X securities at $90x. Y owns Class E common stock with a fair market value of $100x and a CAMT basis of $50x. Z holds $20x of X's securities with a CAMT basis of $10x. As part of an E reorganization, X recapitalizes its Class D and Class E stock into a single class of Class D common stock. X also recapitalizes the $100x securities into preferred stock with a fair market value of $100x.
(B) Analysis. The transaction is a covered nonrecognition transaction. Under paragraph (e)(1)(i) of this section, X disregards any FSI reflected in its AFS from the exchange of its Class D and Class E common stock for the Class D common stock and instead applies the appropriate Code section to determine its AFSI on the exchange, or $0x. Under paragraph (e)(1)(ii) of this section, X adjusts its CAMT retained earnings to reflect the AFSI resulting from the exchange, or by $0x. Under paragraph (e)(3)(i)(A) of this section, Y disregards any FSI reflected in its AFS resulting from the exchange of its Class E common stock for Class D common stock. Under paragraph (e)(3)(i)(B) of this section, Y determines its AFSI resulting from the exchange by applying section 354 of the Code, resulting in $0x AFSI. Under paragraph (e)(3)(iii) of this section, Y takes a CAMT basis in its Class D stock of $50x.
(ii) Example 2: E reorganization and corporate distribution —(A) Facts. X has two classes of common stock outstanding, held as follows: Y owns 99 shares of Class D common stock with a CAMT basis of $99x and a fair market value of $198x, and Z owns one share of Class E common stock with a CAMT basis of $1x and a fair market value of $2x. In order to simplify its capital structure and eliminate minority interests, Y engages in a transaction in which the Class D and Class E stock are recapitalized into a single class of common stock. In the exchange, Y exchanges its 99 shares of Class D X stock for 33 shares of X stock, and Z receives $2x cash in exchange for its one share in lieu of X issuing a fractional share of stock.
(B) Analysis. Y's exchange of Class D common stock for new X common stock is a covered nonrecognition transaction. Z's exchange of its share of Class E common stock for cash is a covered recognition transaction. Under paragraph (e)(2) of this section, X determines its aggregate AFSI and CAMT earnings by treating each component transaction separately. With respect to the covered nonrecognition transaction, the analysis is similar to paragraph (e)(4)(i)(B) of this section ( Example 1 ), except that Y's CAMT basis in its 33 shares of X stock is $99x. See § 1.56A-18(d) for rules relating to the computation of AFSI for Z and X with respect to the complete redemption of Z's interest in X for cash.
(f) CAMT consequences of F reorganizations —(1) Transferor corporation in covered nonrecognition transaction. If a transferor corporation transfers property to a resulting corporation in an F reorganization that qualifies the transferor corporation solely for nonrecognition treatment (that is, a covered nonrecognition transaction), the transferor corporation—
(i) Determines the transferor corporation's AFSI resulting from the covered nonrecognition transaction by—
(A) Disregarding any resulting gain or loss reflected in the transferor corporation's FSI; and
(B) Applying section 361 to the transfer (that is, no AFSI is recognized by the transferor corporation);
(ii) Determines the transferor corporation's CAMT basis in any property received from the resulting corporation by applying section 358 using the CAMT basis (in lieu of AFS basis) of the property transferred by the transferor corporation to the resulting corporation; and
(iii) Adjusts the transferor corporation's CAMT earnings (in lieu of AFS retained earnings) resulting from the covered nonrecognition transaction by applying section 312.
(2) Component transactions consisting of covered nonrecognition transaction and corporate distributions. If a transaction that qualifies as an F reorganization includes a transfer of money or other property (other than stock in the resulting corporation) to a transferor corporation shareholder or security holder, the transferor corporation determines its aggregate resulting AFSI and CAMT earnings by treating each of the following component transactions separately—
(i) Each component transaction that qualifies as a covered nonrecognition transaction; and
(ii) Each component transaction that is treated as a distribution of property by the transferor corporation to a transferor corporation shareholder or security holder. See § 1.56A-18(d) for rules addressing non-liquidating corporate distributions.
(3) Resulting corporation. If a resulting corporation transfers solely stock, or stock and money or other property, to a transferor corporation as part of an F reorganization that qualifies the resulting corporation for nonrecognition treatment under section 1032(a) (that is, a covered nonrecognition transaction), the resulting corporation—
(i) Determines the resulting corporation's AFSI resulting from the covered nonrecognition transaction by—
(A) Disregarding any resulting gain or loss reflected in the resulting corporation's FSI; and
(B) Applying section 1032(a) to the transfer (that is, no AFSI is recognized by the resulting corporation);
(ii) Determines the resulting corporation's CAMT basis in the property received from the transferor corporation by applying section 362 using the CAMT basis (in lieu of AFS basis) of that property; and
(iii) Adjusts the resulting corporation's CAMT retained earnings (in lieu of AFS retained earnings) resulting from the covered nonrecognition transaction by applying sections 381(c)(2) and 312.
(4) Transferor corporation shareholder or security holder. A transferor corporation shareholder or security holder described in paragraph (f)(1) or (2) of this section—
(i) Determines the transferor corporation shareholder's or security holder's AFSI resulting from the covered transaction by—
(A) Disregarding any resulting gain or loss reflected in its FSI;
(B) Applying the relevant provision of the Code; and
(C) Using the distribution amount reflected on its AFS, taking into account (for purposes of the relevant section of the Code) the transferor corporation shareholder's or security holder's CAMT basis in its transferor corporation stock;
(ii) Determines the characterization of any distribution (to the extent applicable) by applying the relevant section of the Code based on the CAMT earnings (in lieu of AFS earnings and profits) of the transferor corporation;
(iii) Determines the transferor corporation shareholder's or security holder's CAMT basis in the stock of the resulting corporation resulting from the exchange by applying the relevant section of the Code using the transferor corporation shareholder's or security holder's CAMT basis in the stock (in lieu of basis for regular tax purposes);
(iv) Determines the transferor corporation shareholder's or security holder's CAMT basis in the property received by applying the relevant section of the Code, using CAMT basis in lieu of AFS basis; and
(v) Adjusts (to the extent applicable) its CAMT earnings (in lieu of AFS retained earnings) resulting from the exchange by applying section 312 based on its AFSI, as determined under paragraph (f)(4)(i) of this section.
(5) Examples. The following examples illustrate the application of the rules in this paragraph (f). For purposes of these examples, each entity is a domestic corporation that uses the calendar year as its taxable year and is not a member of a tax consolidated group.
(i) Example 1: Covered nonrecognition transaction —(A) Facts. X is organized in State G. X has a single class of stock owned by Y, Z, and W as follows: Y owns 50 shares, with a fair market value of $100x and a CAMT basis of $50x; Z owns 45 shares, with a fair market value of $90 and a CAMT basis of $45; and W owns 5 shares with a fair market value of $10 and a CAMT basis of $5. X's assets have a fair market value of $200x and a CAMT basis of $75x. X has $350x CAMT retained earnings and $0x CAMT current earnings. In 2024, X organizes U as a State H corporation. Y, Z, and W contribute their X stock to U in exchange for U stock, and U converts X to a limited liability company under State H law.
(B) Analysis. The reorganization is a covered nonrecognition transaction. Under paragraph (f)(1)(i) of this section, X determines its AFSI by disregarding any FSI reflected in its AFS resulting from the transfer of its assets to U and instead applies section 361 to the exchange, resulting in $0x AFSI. Under paragraph (f)(1)(ii) of this section, X takes a $75x CAMT basis in the U stock it is deemed to receive. Under paragraph (f)(1)(iii) of this section, X adjusts its CAMT retained earnings by the amount of its AFSI, or $0x. Under paragraph (f)(3)(i) of this section, U disregards any FSI on its AFS resulting from the issuance of its stock in exchange for X's assets, and instead applies section 1032(a), resulting in $0x AFSI on the exchange. Under paragraph (f)(3)(ii) of this section, U takes the assets received from X at X's CAMT basis, or $75x. Under paragraph (f)(3)(iii) of this section, U adjusts its CAMT retained earnings by taking into account X's CAMT retained earnings, or $350x, plus the AFSI recognized on the exchange, or $0x. Under paragraph (f)(4)(i) of this section, each of Y, Z, and W, would disregard any FSI reflected in its AFS resulting from the exchange of X stock for U stock, and instead would apply section 354 to the exchange, resulting in $0x AFSI. Under paragraph (f)(4)(iv) of this section, each of Y, Z, and W would determine its basis in the U stock by applying section 358, resulting in Y taking a CAMT basis in the U stock of $50x, Z taking a CAMT basis in the U stock of $45x, and W taking a CAMT basis in the U stock of $5x. Under paragraph (f)(4)(v) of this section, each of Y, Z, and W would adjust CAMT retained earnings by the amount of AFSI recognized on the exchange, or $0x.
(ii) Example 2: Component transactions —(A) Facts. The facts are the same as in paragraph (f)(5)(i)(A) of this section ( Example 1 ), except that as part of the transaction, U distributes $10x cash to W in complete redemption of W's stock.
(B) Analysis. The F reorganization involving Y and Z is a covered nonrecognition transaction. The redemption by U of all of W's stock is a covered recognition transaction. Under paragraph (f)(2) of this section, U determines its aggregate AFSI and CAMT earnings by treating each component transaction separately. With respect to the covered nonrecognition transaction, the analysis is similar to paragraph (f)(5)(i)(B) of this section ( Example 1 ). With respect to the covered recognition transaction, see § 1.56A-18(d).
(g) CAMT consequences of section 351 exchanges —(1) Component transactions consisting of covered recognition and covered nonrecognition transactions. If a section 351 exchange has more than one section 351 transferor, and if the section 351 transferee transfers solely stock to at least one section 351 transferor and transfers money or other property in addition to its stock to at least one other section 351 transferor, the section 351 transferee determines its aggregate resulting AFSI, CAMT basis, and CAMT earnings consequences by treating each of the following component transactions separately—
(i) Each component transaction in which the section 351 transferee transfers solely stock (including nonqualified preferred stock described in section 351(g)(2)) to a section 351 transferor (that is, a covered nonrecognition transaction with respect to the section 351 transferee); and
(ii) Each component transaction in which the section 351 transferee transfers money or other property in addition to its stock to a section 351 transferor (that is, a covered recognition transaction with respect to the section 351 transferee).
(2) Section 351 transferor in covered nonrecognition transaction. If a section 351 transferor transfers property to a section 351 transferee in a transaction to which section 351(a) applies to the section 351 transferor (that is, a covered nonrecognition transaction with respect to the section 351 transferor), the section 351 transferor—
(i) Determines the section 351 transferor's AFSI resulting from the transfer by—
(A) Disregarding any resulting gain or loss reflected in the section 351 transferor's FSI; and
(B) Applying section 351 to the transfer (that is, no AFSI is recognized by the section 351 transferor); and
(ii) Determines the section 351 transferor's CAMT basis in the stock received from the section 351 transferee by applying section 358 using the CAMT basis (in lieu of AFS basis) of the property transferred by the section 351 transferor to the section 351 transferee.
(3) Section 351 transferor in covered recognition transaction. If a section 351 transferor transfers property to a section 351 transferee in a transaction in which section 351(b) applies (including by reason of section 351(g)) to the section 351 transferor (that is, a covered recognition transaction with respect to the section 351 transferor), the section 351 transferor—
(i) Determines the section 351 transferor's AFSI resulting from the transfer by redetermining any resulting gain or loss, if any, reflected in its FSI by reference to its CAMT basis in the transferred property (in lieu of AFS basis);
(ii) Determines the section 351 transferor's CAMT basis in the property received from the section 351 transferee to be equal to the section 351 transferor's AFS basis in that property; and
(iii) Adjusts the section 351 transferor's CAMT retained earnings (in lieu of AFS retained earnings) based on the section 351 transferor's AFSI, as determined under paragraph (g)(3)(i) of this section.
(4) Section 351 transferee in covered nonrecognition transaction. If a section 351 transferee transfers solely stock to a section 351 transferor in a transaction in which section 1032(a) applies to the section 351 transferee (that is, a covered nonrecognition transaction), the section 351 transferee determines its AFSI resulting from the covered nonrecognition transaction and its CAMT basis in the property received from the section 351 transferor under this paragraph (g)(4).
(i) Section 351 transferee's AFSI. The section 351 transferee determines the section 351 transferee's AFSI resulting from the transfer by—
(A) Disregarding any resulting gain or loss reflected in the section 351 transferee's FSI; and
(B) Applying section 1032(a) to the transfer (that is, no AFSI is recognized by the section 351 transferee).
(ii) Section 351 transferee's CAMT basis in property. Except as provided in paragraph (g)(3)(iii) of this section, the section 351 transferee determines the section 351 transferee's CAMT basis in the property received by the section 351 transferee from the section 351 transferor by applying section 362 using the CAMT basis (in lieu of AFS basis) of that property and any CAMT gain recognized by the section 351 transferor in the section 351 exchange.
(iii) Special CAMT basis rule. The section 351 transferee determines its CAMT basis under paragraph (g)(4)(ii) of this section in the property received from a section 351 transferor by redetermining the amount of any CAMT gain recognized by the section 351 transferor to include only the amount, if any, by which the fair market value of the portion of the property transferred by the section 351 transferor exceeds the section 351 transferor's CAMT basis in that portion of the transferred property if—
(A) The section 351 transferor is not an applicable corporation and its AFSI otherwise is not required to be taken into account under the section 56A regulations by any applicable corporation for the taxable year in which qualification of the component transaction as a covered recognition transaction with respect to the section 351 transferor otherwise would be determined under the section 56A regulations,
(B) The section 351 transferee solely transfers its stock to that section 351 transferor, and
(C) The fair market value of nonqualified preferred stock (as defined in section 351(g)(2)) described in paragraph (g)(4)(iii)(B) of this section is 10 percent or less of the aggregate fair market value of the stock described in paragraph (g)(4)(iii)(B) of this section transferred by the section 351 transferee to the section 351 transferor in the section 351 exchange.
(5) Section 351 transferee in covered recognition transaction. If a section 351 transferee transfers money or other property and stock to a section 351 transferor in a transaction to which section 1032(a) applies to the section 351 transferee (that is, a covered recognition transaction), the section 351 transferee determines its AFSI resulting from the transfer and its CAMT basis in the property received from the section 351 transferor, and CAMT retained earnings consequences under this paragraph (g)(5).
(i) Section 351 transferee's AFSI. The section 351 transferee determines the section 351 transferee's AFSI resulting from the transfer by redetermining any resulting gain or loss reflected in the section 351 transferee's FSI by reference to CAMT basis (in lieu of AFS basis).
(ii) Section 351 transferee's CAMT basis in property. Except as provided in paragraph (g)(5)(iii) of this section, the section 351 transferee determines the section 351 transferee's CAMT basis in the property received by the section 351 transferee to be equal to the section 351 transferee's AFS basis in that property.
(iii) Special CAMT basis rule. The section 351 transferee determines its CAMT basis under paragraph (g)(5)(ii) of this section in the property received from a section 351 transferor by redetermining the section 351 transferee's AFS basis in that property to not exceed the sum of the amount of the section 351 transferee's CAMT basis in the transferred property immediately before the section 351 exchange and the amount, if any, by which the fair market value of the portion of the property other than stock of the section 351 transferee transferred to the section 351 transferor exceeds the section 351 transferee's CAMT basis in that portion of the transferred property if—
(A) The section 351 transferor is not an applicable corporation and its AFSI otherwise is not required to be taken into account under the section 56A regulations by any applicable corporation for the taxable year in which qualification of the component transaction as a covered recognition transaction with respect to the section 351 transferee otherwise would be determined under the section 56A regulations,
(B) The section 351 transferee transfers its stock and money or other property to that section 351 transferor, and
(C) The amount of money and fair market value of other property described in paragraph (g)(5)(iii)(B) of this section is 10 percent or less of the sum of the money and the aggregate fair market value of the stock and other property described in paragraph (g)(5)(iii)(B) of this section transferred by the section 351 transferee to the section 351 transferor in the section 351 exchange.
(iv) Section 351 transferee's CAMT retained earnings. The section 351 transferee adjusts the section 351 transferee's CAMT retained earnings (in lieu of AFS retained earnings) based on the section 351 transferee's AFSI, as determined under paragraph (g)(5)(i) of this section.
(6) Examples. The following examples illustrate the application of the rules in this paragraph (g). For purposes of these examples, each entity is a domestic corporation that uses the calendar year as its taxable year and is not a member of a tax consolidated group.
(i) Example 1: Covered nonrecognition transaction —(A) Facts. Acquiror transfers assets with a CAMT basis of $40x and a fair market value of $90x to newly formed Target in a section 351 exchange (Exchange). On its AFS, Acquiror recognizes $50x of FSI on the Exchange ($90x−$40x).
(B) Analysis. The Exchange is a covered nonrecognition transaction to each of Acquiror and Target. Under paragraph (g)(2)(i) of this section, in computing AFSI, Acquiror disregards the FSI reflected in its AFS resulting from the Exchange. Under paragraph (g)(2)(ii) of this section, Acquiror records the Target stock received in the Exchange at the CAMT basis of the assets transferred to Target, or $40x. Under paragraph (g)(4)(i) of this section, Target disregards any FSI reflected in its AFS resulting from the Exchange. Under paragraph (g)(4)(ii) of this section, Target takes a $40x CAMT basis in the assets it receives from Acquiror in the Exchange.
(ii) Example 2: Covered recognition transaction —(A) Facts. The facts are the same as in paragraph (g)(6)(i)(A) of this section ( Example 1 ), except that Acquiror receives $10x of cash in addition to $80x of Target stock in the Exchange.
(B) Analysis. The Exchange is a covered recognition transaction to each of Acquiror and Target. Under paragraph (g)(3)(i) of this section, Acquiror disregards any FSI resulting from the Exchange reflected in its AFS and instead redetermines its AFSI by computing any gain or loss using its CAMT basis in the assets transferred to Target, or $50x ($90x−$40x). Under paragraph (g)(3)(ii) of this section, Acquiror's CAMT basis in the Target stock received is its AFS basis, or $80x. Under paragraph (g)(3)(iii) of this section, Acquiror adjusts its CAMT retained earnings by the amount of AFSI resulting from the Exchange, or $50x. Under paragraph (g)(5)(i) of this section, Target disregards any FSI resulting from the Exchange and instead determines AFSI using CAMT basis, or $90x. Under paragraph (g)(5)(ii) of this section, Target determines its CAMT basis using its AFS basis in the property, or $90x. Paragraph (g)(5)(iii) of this section does not apply. Under paragraph (g)(5)(iv) of this section, Target adjusts its CAMT retained earnings by the amount of AFSI recognized on the Exchange, or $90x, reduced by the $10x cash distributed.
(iii) Example 3: Component transactions —(A) Facts. The facts are the same as in paragraph (g)(6)(ii)(A) of this section ( Example 2 ), except that, as part of the same transaction, unrelated X transfers assets to Target with a CAMT basis of $25x and a fair market value of $120x in exchange for Target stock.
(B) Analysis. The transfer of assets by Acquiror to Target is a covered recognition transaction to each of Acquiror and Target. The transfer of assets by X to Target is a covered nonrecognition transaction to each of X and Target. Under paragraph (g)(1) of this section, Target determines its aggregate AFSI, CAMT basis, and CAMT retained earnings by treating each of the component transactions separately. With respect to the transfer of assets by Acquiror to Target, the analysis is similar to paragraph (g)(6)(ii)(B) of this section ( Example 2 ). Under paragraph (g)(2)(i) of this section, in computing AFSI, X disregards the FSI reflected in its AFS resulting from the Exchange. Under paragraph (g)(2)(ii) of this section, X's CAMT basis of the Target stock received in the Exchange is the CAMT basis of the assets transferred to Target, or $25x. Under paragraph (g)(4)(i) of this section, Target disregards any FSI reflected in its AFS resulting from the Exchange. Under paragraph (g)(4)(ii) of this section, Target takes a $25x CAMT basis in the assets it receives from X in the Exchange.
(iv) Example 4: Covered recognition transaction —(A) Facts. The facts are the same as in paragraph (g)(6)(ii)(A) of this section ( Example 2 ), except that Acquiror is not an applicable corporation and receives $5x of cash in addition to $85x of Target stock in the Exchange.
(B) Analysis. The amount of money transferred by Target to Acquiror in the Exchange is less than 10 percent of the amount of money and the fair market value of stock transferred by Target to Acquiror in the Exchange ($5x/($5x + $85x) = 5.5%). Accordingly, under paragraph (g)(5)(iii) of this section, Target's CAMT basis in the assets received from Acquiror is equal to Acquiror's CAMT basis in the assets immediately before the Exchange ($40) plus $0 of CAMT gain recognized by Target on the transfer of the $5 of cash in the Exchange.
(h) Applicability date. This section applies to taxable years ending after [DATE OF PUBLICATION OF FINAL RULE IN THE FEDERAL REGISTER ].