StacksVerified U.S. regulatory reference

26 CFR §1.7874-4

Verified against eCFR.gov as of June 20, 2026View official text on eCFR.gov ↗
  1. (a)Scope. This section identifies certain stock of the foreign acquiring corporation that is disregarded in determining the ownership fraction and modifies the scope of section 7874(c)(2)(B). Paragraph (b) of this section sets forth the general rule that certain stock of the foreign acquiring corporation, and only such stock, is treated as stock described in section 7874(c)(2)(B) and therefore is excluded from the denominator of the ownership fraction. Paragraph (c) of this section identifies the stock of the foreign acquiring corporation that is subject to paragraph (b) of this section. Paragraph (d) of this section provides a de minimis exception to the application of the general exclusion rule of paragraph (b) of this section. Paragraph (e) of this section provides rules for transfers of stock of the foreign acquiring corporation in satisfaction of, or in exchange for the assumption of, one or more obligations of the transferor. Paragraph (f) of this section provides rules for certain transfers of stock of the foreign acquiring corporation involving multiple properties or obligations. Paragraph (g) of this section provides rules for the treatment of partnerships, and paragraph (h) of this section provides definitions. Paragraph (h) of this section provides definitions. Paragraph (i) of this section provides examples illustrating the application of the rules of this section. Paragraph (j) of this section provides dates of applicability. See § 1.7874-1(d)(1) for rules addressing the interaction of this section with the expanded affiliated group rules of section 7874(c)(2)(A) and § 1.7874-1.
  2. (b)Exclusion of disqualified stock under section 7874(c)(2)(B). Except as provided in paragraph (d) of this section, disqualified stock (as determined under paragraph (c) of this section) is treated as stock described in section 7874(c)(2)(B) and therefore is not included in the denominator of the ownership fraction. Section 7874(c)(2)(B) shall not apply to exclude stock from the denominator of the ownership fraction that is not disqualified stock.
  3. (c)Disqualified stock
    1. (1)General rule. Except as provided in paragraph (c)(2) of this section, disqualified stock is stock of the foreign acquiring corporation (other than stock described in § 1.7874-2(f)) that is transferred in an exchange described in paragraph (c)(1)(i) or (ii) of this section that is related to the domestic entity acquisition. This paragraph (c) applies without regard to whether the stock of the foreign acquiring corporation is publicly traded at the time of the transfer or at any other time.
      1. (i)Exchanged for nonqualified property. The stock is transferred to a person other than the domestic entity in exchange for nonqualified property. See Example 1, Example 2, Example 6, Example 8, and Example 9 of paragraph (i) of this section for illustrations of the application of this paragraph (c)(1)(i).
      2. (ii)Exchanged for property with associated obligations
        1. (A)General rule. Subject to the limitation provided in in paragraph (c)(1)(ii)(B) of this section, the stock is transferred by a person (transferor) to another person (transferee) in exchange for property (exchanged property) and, pursuant to the same plan (or series of related transactions), the transferee subsequently transfers such stock (or, if the transferee exchanges such stock for other property, such other property) in satisfaction of, or in exchange for the assumption of, one or more obligations of the transferee or a person related (within the meaning of section 267 or 707(b)) to the transferee. See Example 6 and Example 10 of paragraph (i) of this section for illustrations of the application of paragraph (c)(1)(ii) of this section.
        2. (B)Limitation. The amount of stock treated as transferred in an exchange described in paragraph (c)(2)(ii)(A) of this section shall not exceed—
          1. (1)With respect to a transferee that is the domestic entity, the proportionate share of obligations associated with the exchanged property (determined based on the fair market value of the exchanged property relative to the fair market value of all properties with which the obligations are associated) that, pursuant to the same plan (or series of related transactions), is not assumed by the transferor.
          2. (2)With respect to any other transferee, the proportionate share of obligations associated with the exchanged property (determined based on the fair market value of the exchanged property relative to the fair market value of all properties with which the obligations are associated) that, pursuant to the same plan (or series of related transactions), is not assumed by the transferor, multiplied by a fraction, the numerator of which is the amount of exchanged property that is qualified property, and the denominator of which is the total amount of exchanged property.
        3. (C)Associated obligations. For purposes of paragraph (c)(1)(ii) of this section, an obligation is associated with property if, for example, the obligation arose from the conduct of a trade or business in which the property has been used, regardless of whether the obligation is a non-recourse obligation.
    2. (2)Stock transferred in an exchange that does not increase the fair market value of the assets or decrease the amount of liabilities of the foreign acquiring corporation. Stock is disqualified stock only to the extent that the transfer of the stock in the exchange increases the fair market value of the assets of the foreign acquiring corporation or decreases the amount of its liabilities. This paragraph (c)(2) is applied to an exchange without regard to any other exchange described in paragraph (c)(1)(i) or (ii) of this section or any other transaction related to the domestic entity acquisition. See Example 4 and Example 7 of paragraph (i) of this section for illustrations of the application of this paragraph (c)(2).
  4. (d)Exception to exclusion of disqualified stock
    1. (1)De minimis ownership. Except as provided in paragraph (d)(2) of this section, paragraph (b) of this section does not apply if both:
      1. (i)The ownership percentage described in section 7874(a)(2)(B)(ii), determined without regard to the application of paragraph (b) of this section and §§ 1.7874-7(b) and 1.7874-10(b), is less than five (by vote and value); and
      2. (ii)On the completion date, each five percent former domestic entity shareholder or five percent former domestic entity partner, as applicable, owns (applying the attribution rules of section 318(a) with the modifications described in section 304(c)(3)(B)) less than five percent (by vote and value) of the stock of (or a partnership interest in) each member of the expanded affiliated group. For this purpose, a five percent former domestic entity shareholder (or five percent former domestic entity partner) is a former domestic entity shareholder (or former domestic entity partner) that, before the domestic entity acquisition, owned (applying the attribution rules of section 318(a) with the modifications described in section 304(c)(3)(B)) at least five percent (by vote and value) of the stock of (or a partnership interest in) the domestic entity. See Example 5 of this paragraph (i) for an illustration of this paragraph (d).
    2. (2)Stock issued to avoid the purposes of section 7874. The exception in paragraph (d)(1) of this section does not apply to disqualified stock that is transferred in a transaction (or series of transactions) related to the domestic entity acquisition with a principal purpose of avoiding the purposes of section 7874.
  5. (e)Satisfaction or assumption of obligations. Except to the extent stock is treated as disqualified stock as a result of being described in paragraph (c)(1)(ii) of this section, this paragraph (e) applies if, in a transaction related to the domestic entity acquisition, stock of the foreign acquiring corporation is transferred to a person other than the domestic entity in exchange for the satisfaction or the assumption of one or more obligations of the transferor. In such a case, solely for purposes of this section, the stock of the foreign acquiring corporation is treated as if it is transferred in exchange for an amount of cash equal to the fair market value of such stock.
  6. (f)Transactions involving multiple properties. For purposes of this section, if stock and other property are exchanged for qualified property and nonqualified property, the stock is treated as transferred in exchange for the qualified property or nonqualified property, respectively, based on the relative fair market value of the property. See also § 1.7874-2(f)(2) (allocating stock of a foreign acquiring corporation between an interest in the domestic entity and other property).
  7. (g)Treatment of partnerships. For purposes of this section, if one or more members of the expanded affiliated group own, in the aggregate, more than 50 percent (by value) of the interests in a partnership, such partnership is treated as a corporation that is a member of the expanded affiliated group.
  8. (h)Definitions. In addition to the definitions in § 1.7874-12, the following definitions apply for purposes of this section:
    1. (1)Marketable securities has the meaning set forth in section 453(f)(2), except that the term marketable securities does not include stock of a corporation or an interest in a partnership that becomes a member of the expanded affiliated group in a transaction (or series of transactions) related to the domestic entity acquisition. See Example 4 of paragraph (i) of this section for an illustration of this paragraph (h)(1).
    2. (2)Nonqualified property is property described in paragraphs (h)(2)(i) through (iv) of this section. Thus, stock in a corporation or an interest in a partnership is nonqualified property to the extent provided in paragraph (h)(2)(ii) or (iv) of this section. Qualified property is property other than nonqualified property.
      1. (i)Cash or cash equivalents.
      2. (ii)Marketable securities, within the meaning of paragraph (h)(1) of this section.
      3. (iii)An obligation owed by any of the following:
        1. (A)A member of the expanded affiliated group, unless the holder of the obligation immediately before the domestic entity acquisition and any related transaction (or its successor) is a member of the expanded affiliated group after the domestic entity acquisition and all related transactions. See Example 6 of paragraph (i) of this section for an illustration of this paragraph (h)(2)(iii)(A).
        2. (B)A former domestic entity shareholder or former domestic entity partner of the domestic entity that owns (applying the attribution rules of section 318(a) with the modifications described in section 304(c)(3)(B)) at least five percent (by vote or value) of the stock of, or partnership interests in, the domestic entity before the domestic entity acquisition.
        3. (C)A person, other than a member of the expanded affiliated group, that, before or after the domestic entity acquisition, either owns (applying the attribution rules of section 318(a) with the modifications described in section 304(c)(3)(B)) at least five percent (by vote or value) of the stock of (or partnership interests in) or is related (within the meaning of section 267 or 707(b)) to—
          1. (1)A member of the expanded affiliated group; or
          2. (2)A person described in paragraph (h)(2)(iii)(B) of this section.
      4. (iv)Any other property acquired with a principal purpose of avoiding the purposes of section 7874, regardless of whether the transaction involves an indirect transfer of property described in paragraph (h)(2)(i), (ii), or (iii) of this section. See Example 2 and Example 3 of paragraph (i) of this section for illustrations of the application of this paragraph (h)(2)(iv).
    3. (3)An obligation means any fixed or contingent obligation to make a payment or provide value without regard to whether the obligation is otherwise taken into account for purposes of the Internal Revenue Code. An obligation includes, but is not limited to, a debt obligation, an environmental obligation, a tort obligation, a contract obligation (including an obligation to provide goods or services), a pension obligation, an obligation under a short sale, and an obligation under derivative financial instruments such as options, forward contracts, futures contracts, and swaps. An obligation does not include any obligation treated as stock for purposes of section 7874 (see, for example, § 1.7874-2(i), which treats certain interests, including certain creditor claims, as stock).
    4. (4)A transfer is, with respect to stock of the foreign acquiring corporation, an issuance, sale, distribution, exchange, or any other disposition of such stock.
      1. (i)Examples. The following examples illustrate the application of the rules of this section. For purposes of the examples, unless otherwise indicated, assume the following facts in addition to the facts stated in the examples:
        1. (1)FA, FMS, FS, and FT are foreign corporations, all of which have only one class of stock issued and outstanding;
        2. (2)DMS and DT are domestic corporations;
        3. (3)P and R are corporations that may be either domestic or foreign;
        4. (4)PRS is a partnership with individual partners;
        5. (5)The de minimis ownership exception in paragraph (d)(1) of this section does not apply;
        6. (6)None of the shareholders or partners in the entities described in the examples are related persons with respect to each other;
        7. (7)All transactions described in each example occur pursuant to the same plan;
        8. (8)No property is acquired with a principal purpose of avoiding the purposes of section 7874;
        9. (9)FA, FMS, FS, and FT are tax residents in the same foreign country;
        10. (10)For purposes of determining the ownership fraction, no shares of FA stock are excluded from the denominator pursuant to § 1.7874-7(b) (which disregards stock attributable to passive assets); and
        11. (11)For purposes of determining the ownership fraction, no shares of FA stock are treated as received by former shareholders of DT pursuant to § 1.7874-10(b) (which disregards certain distributions).
  9. (j)Applicability dates
    1. (1)General rule. Except to the extent otherwise provided in paragraph (j) of this section, this section applies to domestic entity acquisitions completed on or after September 17, 2009. Paragraphs (h)(1) and (h)(2)(iv) of this section apply to domestic entity acquisitions completed on or after November 19, 2015. Paragraph (d)(1)(i) of this section applies to domestic entity acquisitions completed on or after April 4, 2016. Paragraphs (c)(1)(ii), (h)(2)(iii), and (h)(3) of this section apply to domestic entity acquisitions completed on or after January 13, 2017. For domestic entity acquisitions completed before November 19, 2015, see § 1.7874-4T(i)(6) and (i)(7)(iv) (the predecessors of paragraphs (h)(1) and (h)(2)(iv) of this section) as contained in 26 CFR part 1 revised as of April 1, 2016. For domestic entity acquisitions completed on or after September 22, 2014, and before April 4, 2016, see § 1.7874-4T(d)(1)(i) as contained in 26 CFR part 1 revised as of April 1, 2016. For domestic entity acquisitions completed before January 13, 2017, see § 1.7874-4T(c)(1)(ii), (i)(7)(iii) (the predecessor of paragraph (h)(2)(iii) of this section), and (i)(8) (the predecessor of paragraph (h)(3) of this section) as contained in 26 CFR part 1 revised as of April 1, 2016. Paragraph (d)(1)(ii) of this section applies to domestic entity acquisitions completed on or after July 12, 2018, though taxpayers may elect to consistently apply paragraph (d)(1)(ii) of this section to domestic entity acquisitions completed before July 12, 2018. For domestic entity acquisitions completed before July 12, 2018, see § 1.7874-4(d)(1)(ii) as contained in 26 CFR part 1 revised as of April 1, 2017.
    2. (2)Transitional rules for domestic entity acquisitions completed on or after September 17, 2009, but before January 16, 2014. For domestic entity acquisitions completed on or after September 17, 2009, but before January 16, 2014, except as provided in paragraph (j)(3) of this section, this section shall be applied with the following modifications:
      1. (i)Nonqualified property does not include property described in paragraph (h)(2)(iii) of this section.
      2. (ii)A transfer is limited to an issuance of stock of the foreign acquiring corporation.
      3. (iii)The determination of whether stock of the foreign acquiring corporation is described in paragraph (c)(1) of this section is made without regard to paragraphs (c)(1)(ii), (c)(2), and (e) of this section.
      4. (iv)Paragraph (d) of this section and § 1.7874-1(d)(1)do not apply.
    3. (3)Election for domestic entity acquisitions completed on or after September 17, 2009, and before January 13, 2017. If, pursuant to paragraph (j)(1) or (2) of this section, a paragraph of this section would not otherwise apply to a domestic entity acquisition completed on or after September 17, 2009, and before January 13, 2017 (transition period), a taxpayer may elect to apply the paragraph if the taxpayer applies the paragraph consistently to all acquisitions completed during the transition period. The election is made by applying the paragraph to all such acquisitions on a timely filed original return (including extensions) or an amended return filed no later than six months after January 13, 2017. A separate statement or form evidencing the election need not be filed.