[Code of Federal Regulations]
[Title 26, Volume 4]
[Revised as of April 1, 2005]
From the U.S. Government Printing Office via GPO Access
[CITE: 26CFR1.341-7]

[Page 175-181]
 
                       TITLE 26--INTERNAL REVENUE
 
    CHAPTER I--INTERNAL REVENUE SERVICE, DEPARTMENT OF THE TREASURY 
                               (CONTINUED)
 
PART 1_INCOME TAXES--Table of Contents
 
Sec. 1.341-7  Certain sales of stock of consenting corporations.

    (a) In general. (1) Under section 341(f)(1), if a corporation 
consents (in the manner provided in paragraph (b) of this section) to 
the application of section 341(f)(2) with respect to dispositions by it 
of its subsection (f) assets (as defined in paragraph (g) of this 
section), then section 341(a)(1) does not apply to any sales of stock of 
such consenting corporation (other than sale to such corporation) made 
by any of its shareholders within the 6-month period beginning on the 
date on which such consent is filed.
    (2) For purposes of section 341(f)(1) and (5)--(i) The term sale 
means a sale of exchange of stock at a gain, but only if such gain would 
be recognized as long-term capital gain were section 341 not a part of 
the Code. Thus, a sale or exchange of stock is not a ``sale'' within the 
meaning of section 341(f)(1) and (5) if there is no gain on the 
transaction, or if the sale or exchange gives rise to ordinary income 
under a provision of the Code other than section 341, or if gain on the 
transaction is not recognized under any provisions of subtitle A of the 
Code.
    (ii) A sale of stock in a corporation does not include any 
disposition of such stock by a shareholder, if, by reason of section 
341(d)(1), section 341(a) could not have applied to that disposition. 
(Under section 341(d)(1), section 341(a) does not apply except to more-
than-5-percent shareholders.) Except as otherwise provided in paragraph 
(a)(2)(i) of this section, the term ``sale'' included a disposition of 
stock in a corporation by a more-than-5-percent shareholders described 
in section 341(d)(1), even though section 341(a) did not apply to the 
disposition because the corporation was not collapsible or by reason of 
the application of section 341(d)(2), (3), or (e).
    (3) A corporation which consents to the application of section 
341(f)(2) does not thereby become noncollapsible, and the fact that a 
corporation consents to the application of section 341(f)(2) does not 
affect the determination as to whether it is a collapsible corporation.
    (4) For limitation on the application of section 341(f)(1) see 
section 341(f)(5) and (6) and paragraphs (h) and (j) of this section.
    (b) Statement of consent. (1) The consent of a corporation referred 
to in paragraph (a)(1) or (j)(1) of this section shall be given by means 
of a statement, signed by any officer who is duly authorized to act on 
behalf of the consenting corporation stating that the corporation 
consents to have the provisions of section 341(f)(2) apply to any 
disposition by it of its subsection (f) assets. The statement shall be 
filed with the district director having jurisdiction over the income tax 
return of the consenting corporation for the taxable year during which 
the statement is filed.
    (2)(i) The statement shall contain the name, address, and employer 
identification number of any corporation 5 percent or more in value of 
the outstanding stock of which is owned directly by the consenting 
corporation, and of any other corporation connected to the consenting 
corporation through

[[Page 176]]

a chain of stock ownership described in paragraph (j)(4) of this 
section. The statement shall also indicate where such 5-percent-or-more 
corporation (or such ``connected'' corporation) has consented within the 
6-month period ending on the date on which the statement filed to the 
application of section 341 (f)(2) with respect to any dispositions of 
its subsection (f) assets (see paragraph (j) of this section), and, if 
so, the district director with whom such consent was filed and the date 
on which such consent was filed.
    (ii) If, during the 6-month period beginning on the date on which 
the statement is filed, the consenting corporation becomes the owner of 
5 percent or more in value of the outstanding stock of another 
corporation or becomes connected to another corporation through a chain 
of stock ownership described in paragraph (j)(4) of this section, then 
the consenting corporation shall, within 5 days after such occurrence, 
notify the district director with whom it filed the statement of the 
name, address and employer identification number of such corporation.
    (3) A consent under section 341(f)(1) may be filed at any time and 
there is no limit as to the number of such consents that may be filed. 
If a consent is filed by a corporation under section 341(f)(1) and if a 
shareholder sells stock (i) in such corporation, or (ii) in another 
corporation a sale of whose stock is treated under section 341(f)(6) as 
a sale of stock in such corporation, at any time during the applicable 
6-month period, then the consent cannot thereafter be revoked or 
withdrawn by the corporation. However, a consent may be revoked or 
withdrawn at any time prior to a sale during the applicable 6-month 
period. If no sale is made during such period, the consent will have no 
effect on the corporation. See paragraph (g) of this section.
    (c) Consenting corporation. (1) A consenting corporation at the time 
that is filed a consent under section 341(f)(10) shall notify its 
shareholders that such consent is being filed. In addition, the 
consenting corporation shall, at the request of any shareholder, 
promptly supply the shareholder with a copy of the consent.
    (2) A consenting corporation shall maintain records adequate to 
permit identification of its subsection (F) assets.
    (d) Shareholders of consenting corporation. (1) A shareholder who 
sells stock in a consenting corporation within the 6-month period 
beginning on the date on which the consent is filed shall--
    (i) Notify the corporation, within 5 days after such sale, of the 
date on which such sale is made, and
    (ii) Attach a copy of the corporation's consent to the shareholder's 
income tax return for the taxable year in which the sale is made.
    (2) If the sale of stock in a consenting corporation is treated 
under section 341(f)(6) as the sale of stock in any other corporation, 
the consenting corporation shall notify such other corporation, within 5 
days after receiving notification of a sale of its stock, of the date on 
which such sale was made.
    (e) Recognition of gain under section 341(f)(2). (1) Under section 
341(f)(2), if a subsection (f) asset (as defined in paragraph (g) of 
this section) is disposed of any time by a consenting corporation, then, 
except as provided in section 341(f)(3) and paragraph (f) of this 
section, the amount by which--
    (i) The amount realized (in the case of a sale, exchange, or 
involuntary conversion), or
    (ii) The fair market value of such asset (in the case of any other 
disposition), exceeds the adjusted base of such asset is treated as gain 
from the sale of exchange of such asset. Such gain is recognized 
notwithstanding any contrary non-recognition provisions of subtitle A of 
the Code, but only to the extent such gain is not recognized under any 
other provisions of subtitle A of the Code (for example, section 1245 
(a)(1) or 1250(a)). Gain recognized under section 341(f)(2) with respect 
to a disposition of a subsection (f) asset has the same character (i.e., 
ordinary income or capital gain) that such gain would have if it arose 
from a sale of such asset.
    (2) The nonrecognition provisions of subtitle A of the Code which 
section 341(f)(2) override include, but are not limited to, sections 
311(a), 332(c), 336, 337, 351, 361, 371(a), 374(a), 721, 1031, 1033, 
1071, and 1081.

[[Page 177]]

    (3) In the case of a foreign corporation which files a statement of 
consent pursuant to paragraph (b) of this section, such statement, in 
addition to the information required in paragraph (b) of this section, 
shall also contain a declaration that the corporation consents that any 
gain upon the disposition of a subsection (f) asset which would 
otherwise be recognized under section 341(f)(2) will, for purposes of 
section 882(a)(2), be considered as gross income which is effectively 
connected with the conduct of a trade or business which is conducted 
through a permanent establishment within the United States.
    (4) The provisions of subparagraphs (1) and (2) of this paragraph 
may be illustrated by the following examples:

    Example (1). Corporation X, a consenting corporation, distributes a 
subsection (f) asset to its shareholders in complete or partial 
liquidation of the corporation. The asset, at the line of the 
distribution, is held by the corporation primarily for sale to customers 
in the ordinary course of business and has an adjusted basis of $1,000 
and a fair market value of $2,000. Under section 341(f)(2), the excess 
of the fair market value of the asset over its adjusted basis, or $1,000 
is treated as ordinary income. Assuming the gain is not recognized by 
corporation X under another provision of the Code, corporation X 
recognizes the $1,000 gain as ordinary income under section 341(f)(2) 
even though, in the absence of section 341(f)(2), section 336 would 
preclude the recognition of such gain.
    Example (2). Corporation Y, a consenting corporation, distributes a 
subsection (f) asset to its shareholders as a dividend. The asset at the 
time of the distribution is properly described in section 1231 and has 
an adjusted basis of $6,000 and a fair market value of $8,000. Assuming 
that no other section of the Code would require recognition of gain, 
under section 341(f)(2) the excess of the fair market value of the asset 
over its adjusted basis, or $2,000, is recognized by corporation Y as 
gain from the sale or exchange of property described in section 1231 
even though, in the absence of section 341(f)(2), section 311(a) would 
preclude the recognition of such gain.
    Example (3). Assume the same facts as in Example (2) except that the 
subsection (f) asset is section 1245 property having a ``recomputed 
basis'' (as defined in section 1245(a)(2)) or $7,200. Since the 
recomputed basis of the asset is lower than its fair market value, the 
excess of the recomputed basis over the adjusted basis, or $1,200, is 
recognized as ordinary income under section 1245(a)(1). The remaining 
amount, or $800, is recognized under section 341(f)(2) as gain from the 
sale or exchange or property described in section 1231.

    (5) The provisions of section 341(f)(2) apply whether or not (i) on 
the date on which a consent is filed or at any time thereafter, the 
consenting corporation was in fact a collapsible corporation within the 
meaning of section 341(b), or (ii) on the date of any sale of stock of 
the consenting corporation, the purchaser of such stock was aware that a 
consent had been filed under section 341(f)(1) within the 6-month period 
ending on the date of such sale.
    (6) Section 341(f)(2) does not apply to losses. Thus, section 
341(f)(2) does not apply if a loss is realized upon a sale, exahnger or 
involuntary conversion of a subsection (f) asset nor does the section 
appy to a disposition other than by way of sale, exchange, or 
involuntary conversion if at the time of the disposition the fair market 
value of such property is not greater than its adjusted basis.
    (7) For purposes of this paragraph, the term ``disposition'' 
includes an abandonment or retirement, a gift, a sale in a sale-and-
leasback transaction, and a transfer upon the foreclosure of a security 
interest. Such term, however, does not include a mere transfer of title 
to a creditor upon creation of a security interest or to a debtor upon 
termination of a security interest. Thus, for example, a disposition 
occurs upon a sale of property prusuant to a conditional sales contract 
even though the seller retains legal title to the propoerty for purposes 
of security, but a disposition does not occur when the seller ultimately 
gives up his security interest following payment by the purchaser.
    (8) The amount of gain required to be recognized by section 
341(f)(2) shall be determined separately for each subsection (f) asset 
disposed of by the corporation. For purposes of applying section 
341(f)(2), the facts and circumstances of each disposition shall be 
considered in determining whether the transactions involves more than 
one subsection (f) asset or involves both subsection (f) and 
nonsubsection (f) assets. In appropriate cases, several subsection (f) 
assets may be treated as a single asset as long as it is reasonably

[[Page 178]]

clear, from the best estimates obtainable on the basis of all the facts 
and circumstances, that the amount of gain required to be recognized by 
section 341(f)(2) is not less than the total gain under section 
341(f)(2) whish would be computed separately for each subsection (f) 
asset.
    (9) In the case of a sale, exchange, or involuntary conversion of a 
subsection (f) asset and a nonsubsection (f) asset in one transaction, 
the total amount realized upon the disposition shall be allocated 
between the subsection (f) asset any arm's length agreement between the 
buyer and the seller will establish the allocation. In the absence of 
such an agreement, the allocation shall be made by taking into account 
the appropriate facts and circumstances. Some of the facts and 
circumstances which shall be taken into account to the extent 
appropriate included, but are not limited to, a comparision between the 
subsection (f) asset and all property disposed of in such transaction of 
(i) the original costs and reproduction costs of construction, erection, 
or production, (ii) the remaining economic useful life, (ii) state of 
obsolencence, and (iv) anticipated expenditures to maintain, renovate, 
or modernize.
    (10) See Sec. 1.1502-13 for the treatment of gain recognized upon a 
distribution other than in complete liquidation made by one member of a 
group which files a consolidated return to another such members.
    (f) Exception for certain tax-free transactions. (1) Under section 
341(f)(3), no gain is taken into account under section 341(f)(2) by a 
transferor corporation on the transfer of a subsection (f) asset to 
another corporation (other than a corporation exempt from tax imposed by 
chapter 1 of the Code) if--
    (i) The basis of such asset in the hands of the transferee 
corporation is determined by reference to its basis in the hands of the 
transferor by reason of the application of section 332 (relating to 
distributions in liquidation of an 80-percent-or-more controlled 
subsidairy corporation), section 351 (relating to transfers to a 
corporation controlled by the transferor), section 361 (relating to 
exchanges pursuant to certain reorganizations), section 371(a) (relating 
to exchanges pursuant to certain receivership and bankruptcy 
proceedings), or section 374 (a) (relating to exchanges pursuant to 
certain railroad reorganizations), and
    (ii) The transferee corporation agrees (as provided in subparagraph 
(3) of this paragraph) to have the provisiions of section 341(f)(2) 
apply to any disposition by it of such asset.
    (2) The provisions of subparagraph (1) of this paragraph may be 
illustrated by the following examples:

    Example (1). Corporation M. in exchange for its voting stock worth 
$20,000 and $1,000 in cash, acquires the entire property of corporation 
N (an unencumbered apartment building) in a transaction which is 
described in section 368(a)(2)(B) and which, therefore, qualifies as a 
reorganization under section 368(a)(1)(C). The apartment building, which 
in the hands of corporation N. a consenting corporation, is a subsection 
(f) asset, has an adjusted basis of $15,000 and a fair market value of 
$21,000. The basis of the apartment house in the hands of corporation M 
is determined by reference to its basis in the hands of corporation N by 
reason of the application of section 361. Thus, under section 341(f)(3), 
if corporation M agrees to have the provisions of section 341(f)(2) 
apply to any disposition by it of the apartment house, then corporation 
N will recognize no gain under section 341(f)(2) but will recognize 
$1,000 gain under section 361(b) (assuming the cash it receives is not 
distributed in pursuance of the plan of reorganization). However, if 
corporation M does not so agree, the gain recognized by corporation N 
will be $6,000, that is, the gain of $1,000 recognized under section 
361(b) plus $5,000 gain recognized under section 341(f)(2). In either 
case, if section 1245, 1250, or 1251 applies, some or all of the gain 
may be recognized under sections in lieu of sections 341(f)(2) and 
361(b).
    Example (2). Corporation Y, a consenting corporation, is a wholly 
owned subsidiary of corporation X. In the complete liquidation of Y it 
distributes to X a subsection (f) asset which is section 1245 property. 
The asset at the time of the distribution has an adjusted basis of 
$10,000, a recomputed basis of $14,000, and a fair market value of 
$10,000. The basis of the asset in the hands of X is determined by 
reference to its basis in the hands of corporation Y by reason of the 
application of section 332. Thus, under section 341(f)(3), if 
corporation X agrees to have the provisions of section 341(f)(2) apply 
to any disposition by it of the subsection (f) asset, then Y will 
recognize no gain under section 341(f)(2) and will recognize no gain 
under section 1245(a)(1) by reason of the application of section 
1245(b)(3). Under section 334(b)(1), the

[[Page 179]]

basis of the subsection (f) asset to corporation X will be the same as 
it would be in the hands of Y, or $10,000. However, if corporation X 
does not so agree, then under section 341(f)(2) $6,000 (the excess of 
the fair market value of the asset over its adjusted basis) will be 
treated as gain from the sale or exchange of the asset. Moreover, under 
section 1245(a)(1) $4,000 (the excess of the recomputed basis over the 
adjusted basis) of the $6,000 will be recognized as ordinary income. The 
basis of the asset to corporation X is $16,000, i.e., the same as it 
would be in the hands of Y ($10,000) increased in the amount of gain 
recognized by Y on the distribution ($6,000).

    (3) The agreement of a transferee corporation referred to in 
subparagraph (1) of this paragraph shall be filed, on or before the date 
on which the subsection (f) assets are transferred, with the district 
director having jurisdiction over its income tax return for the taxable 
year during which the transfer is to be made. The agreement shall be 
signed by any officer who is duly authorized to act on behalf of the 
transferee corporation (if the transaxtion is one to which section 
371(a) or 374(a) applies, the fiduciary for the transferee corporation, 
in appropriate cases, may sign the agreement) and shall apply to all the 
subsection (f) assets to be transferred pursuant to the applicable 
transaction described in section 341(f)(3). The agreement shall identify 
the transaction by which the subsection (f) assets will be acquired, 
including the names, addresses, and employer identification numbers of 
the transferor and transferee corporations, and shall contain a schedule 
of the subsection (f) assets to be acquired. The agreement shall also 
state that the transferee corporation (i) agrees to have the provisions 
of section 341(f)(2) apply to any disposition by it of the subsection 
(f) assets acquired, and (ii) agrees to maintain records adequate to 
permit identification of such subsection (f) assets.
    (4) The transferor corporation shall attach a copy of the agreement 
to its income tax return for the taxable year in which the subsection 
(f) assets are transferred.
    (g) Subsection (f) asset defined. (1) Under section 341(f)(4), a 
subsection (f) asset is any property which, as of the date of any sale 
of stock to which paragraph (a) or (j)(3) of this section applies, is 
not a capital asset and is property owned by, or subject to a binding 
contract or an option to acquire held by, the consenting corporation. 
Land or any interest in real property (other than a security interest) 
is treated as property which is not a capital asset. Also, unrealized 
receivables or fees (as defined in section 341(b)(4)) are treated as 
property which are not capital assets.
    (2) If, with respect to any property described in subparagraph (1) 
of this paragraph, manufacture, construction, or production has been 
commenced by either the consenting corporation or another person before 
any date of sale of stock described in subparagraph (1) of this 
paragraph, a consenting corporation's subsection (f) assets include any 
property resulting from such manufacture, construction, or production. 
Thus, for example, if, on the date of any sale of stock within the 6-
month period, manufacture, construction, or production has been 
commended on a tract of land to be used for residential housing or on a 
television series, the term ``subsection (f) asset'' includes the 
residential homes of the television tapes resulting from such 
manufacture, construction, or production by the consenting corporation 
(or by a transferee corporation which has agreed to the application of 
section 341(f)(2)). If land or any interest in real property (other than 
a security interest) is owned or held under an option by the consenting 
corporation on the date of any sale of stock described in subparagraph 
(1) of this paragraph, the term ``subsection (f) asset'' includes any 
improvements resulting from construction with respect to such property 
(by the consenting corporation or by a transferee corporation which has 
agreed to the application of section 341(f)(2)) if such construction is 
commenced within 2 years after the date of any such sale. The property 
or improvements resulting from any manufacture, construction, or 
production is a question to be determined on the basis of the particular 
facts and circumstances of each individual case. Thus, for example, a 
building which is a part of an integrated project is a subsection (f) 
asset

[[Page 180]]

if construction of the project commenced before the date of sale or 
within 2 years thereafter even if construction of the building commenced 
more than 2 years thereafter. Similarly a television tape which is part 
of a series is a subsection (i) asset if production of the series was 
commenced on the date of sale even if production of the tape commenced 
after the sale.
    (3) The provisions of subparagraphs (1) and (2) of this paragraph 
may be illustrated by the following examples:

    Example (1). Corporation X files a consent to the application of 
section 341(f)(2) on January 1, 1985. Shareholder A owns 100 percent of 
the outstanding stock of the consenting corporation on January 1, 1965, 
and sells 5 percent of the stock on January 2, 1965, 10 percent on 
February 10, 1963, and 1 percent on May 1, 1965. No other sales of X 
stock were made during the 6-month period beginning on January 1, 1965. 
On such date X owns an apartment building and on March 1 X purchases an 
office building. X's subsection (f) assets include the apartment 
building owned on January 1 and the office building purchased on March 
1.
    Example (2). Assume the same facts as in Example (1) except that on 
January 1, 1965, X also owns a tract of raw land. On April 1, 1965, 
construction of a residential housing project is commenced on the tract 
of land. Corporation X's subsection (i) assets will include the tract of 
land plus the resulting improvements to the land. This result would not 
be changed if construction of the residential housing project were not 
commenced until July 1, 1966, since the construction would have been 
commenced within 2 years after May 1, 1965.
    Example (3). Corporation X files a consent to the application of 
section 341(f)(2) on January 1, 1965. Shareholder B owns 100 percent of 
the outstanding stock of the consenting corporation on January 1, 1965, 
and sells 10 percent of the stock on June 1, 1965. On April 1, 1965, Y 
acquires an option to purchase a motion picture when completed. On May 
1, 1965, production is started on the motion picture. On February 1, 
1967, production is completed, and Y exercises its option. Y holds the 
option and the motion picture for use in its trade or business. Y's 
subsection (f) assets initially include the option and ultimately 
include the motion picture. However the exercise of the option is not a 
disposition of the option within the meaning of section 341(f)(2).

    (h) Five-year limitation as to shareholder. Under section 341(f)(5), 
section 341(f)(1) does not apply to the sale of stock of a consenting 
corporation if, during the 5-year period ending on the date of such 
sale, such shareholder (or any person related to such shareholder within 
the meaning of section 341(e)(8)(A)) made a sale (as defined in 
paragraph (a)(2) of this section) of any stock of another consenting 
corporation within any 6-month period beginning on a date on which a 
consent was filed under section 341(f)(1) by such other corporation. 
Section 341(f)(5) does not prevent a shareholder of a consenting 
corporation from receiving the benefit of section 341(f)(1) on the sale 
of additional shares of the stock of the same consenting corporation.
    (i) [Reserved]
    (j) Special rule for stock ownership in other corporations--(1) 
Section 341(f)(6) provides a special rule applicable to a consenting 
corporation which owns 5 percent or more in value of the outstanding 
stock of another corporation. In such a case, a consent filed by the 
consenting corporation shall not be valid with respect to a sale of its 
stock during the applicable 6-month period unless each corporation, 5 
percent or more in value of the outstanding stock of which is owned by 
the consenting corporation on the date of such sale, file (within the 6-
month period ending on the date of such sale) a valid consent under 
section 341(f)(1) with respect to sales of its own stock.
    (2) The provisions of subparagraph (1) of this paragraph may be 
illustrated by the following example:

    Example: Corporation X files a consent under section 341(f)(1) on 
November 1, 1965. On January 1, 1966, the date on which a shareholder of 
corporation X sells stock of X. X owns 80 percent in value of the 
outstanding stock of corporation Y. In order for the consent filed by 
corporation X to be valid with respect to the sale of its stock on 
January 1, 1966, corporation Y must have filed, during the 6-month 
period ending on January 1, 1966, a valid consent under section 
341(f)(1) with respect to sales of its stock.

    (3) For purposes of applying section 341(f)(4) (relating to the 
definition of a subsection (f) asset) to a corporation 5 percent or more 
in value of the outstanding stock of which is owned by the consenting 
corporation, a sale of stock of the consenting corporation to which 
section 341(f)(1) applies shall be treated as a sale of stock of such 
other corporation. Thus, in the example in

[[Page 181]]

subparagraph (2) of this paragraph, the subsection (f) assets of 
corporation Y would include property described in section 341(f)(4) 
owned by or held under an option by corporation Y on January 1, 1966.
    (4) In the case of a chain of corporations connected by the 5-
percent ownership requirement described in subparagraph (1) of this 
paragraph, rules similar to the rules described in subparagraphs (2) and 
(3) of this paragraph shall apply. Thus, in the example in subparagraph 
(2) of this paragraph, if corporation Y owned 5 percent or more of the 
stock of corporation Z on January 1, 1966, then Z must have filed a 
valid consent during the 6-month period ending January 1, 1966, in order 
for the consent filed by X to be valid with respect to the sale of its 
stock on January 1, 1966. In such case any of stock of either X or Y is 
treated as a sale of stock of Z for purposes of applying section 
341(f)(4) to Z.
    (5) If a corporation is a member of an affiliated group (as defined 
in section 1504(a)) that files a consolidated return, a corporation will 
be considered to have filed a consent if a consent is filed on its 
behalf by the common parent under Sec. 1.1502-77(a).
    (k) Effective date. Paragraphs (b), (c), (e)(3), and (f)(3) of this 
section apply only with respect to statements and notifications filed 
more than 30 days after July 6, 1977. Paragraph (d) applies only with 
respect to sales of stock made more than 30 days after July 6, 1977. All 
other provisions of this section appy with respect to transactions after 
August 22, 1964.

[T.D. 7655, 44 FR 68460, Nov. 29, 1979; 45 FR 17982, Mar. 20, 1980; 45 
FR 20464, Mar. 28, 1980; T.D. 8597, 60 FR 36679, July 18, 1995]