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I. INTRODUCTION
Section sec 304(1) transactions generally involve acquisitions of stock in a related corporation for cash, debt, or property other than stock in the acquiring corporation in a transaction that does not qualify as a reorganization. A sec 304 transaction may involve either a "brother-sister" acquisition subject to sec 304(a)(1) or a "parent-subsidiary" acquisition subject to sec 304(a)(2). In the international context, a simple brother-sister sec 304 acquisition might involve the ownership before the acquisition by a common U.S. parent (USP) of two brother-sister foreign subsidiaries, F1 and F2, and the purchase for cash by F1 of the stock in brother-sister F2 from USP. A simple parent-subsidiary sec 304 acquisition might involve the ownership by a U.S. parent (USP) of a chain of foreign subsidiaries -- e.g., USP owns F1 which owns F2 -- and the acquisition for cash by F2 of the stock of F1 from USP.
In the international context, sec 304 acquisitions can be a useful planning tool for repatriating cash or pushing down debt into foreign subsidiaries. Section sec 304 also can create unintended tax consequences in transactions in which the potential application of sec 304 was not identified. The scope and consequences of sec 304 in a variety of common international contexts are discussed separately for so-called "outbound" acquisitions, in which generally the acquiring corporation is foreign, and so-called "inbound" acquisitions, in which generally the acquiring corporation is domestic.
II. THE OUTER LIMITS OF SECTION sec 304
A. Overlap of Section sec 304 with Section sec 351
Example 1. A U.S. corporation, P, owns directly two brother-sister subsidiaries, S1 and S2. S1 acquires the stock of S2 from P for cash or a note. (Example 1 schematic omitted).
If S1, the acquiring corporation, were to issue only S1 stock to P in exchange for P's S2 stock, sec 304 would not apply, because under sec 317 stock in the acquiring corporation does not constitute "property" for purposes of sec 304. The transfer would instead be a sec 351 exchange or, if the acquisition is solely for voting stock, a sec 368(a)(1)(B) reorganization.
To the extent, however, that S1 gives securities or other boot that would constitute property for purposes of sec 304 in a transaction that qualifies as...