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CFR Citation: 26 CFR Part 1

RIN ID: RIN 1545-BH52

TD ID: [TD 9396]

NOTICE: RULES

ACTION: Corporate Reorganizations:

DOCUMENT ACTION: Final regulation.

SUBJECT CATEGORY: Corporate Reorganizations; Amendment to Transfers of Assets or Stock Following a Reorganization

DATES: Effective Date: These regulations are effective on May 9, 2008.

Applicability Date: For dates of applicability, see Sec. 1.368 2(k)(3).

DOCUMENT SUMMARY: This document contains final regulations that amend TD 9361, titled Transfers of Assets or Stock Following a Reorganization. These final regulations make certain clarifying amendments to the rules regarding the effect of certain transfers of assets or stock on the continuing qualification of transactions as reorganizations under section 368(a). These regulations affect corporations and their shareholders.

SUMMARY: Amendment to Transfers of Assets or Stock Following a Reorganization,

SUPPLEMENTAL INFORMATION

As noted in the preamble to TD 9361 (72 FR 60556), Sec. 1.3681(a) provides that a transaction must be evaluated under all relevant provisions of law, including the step transaction doctrine, in determining whether it qualifies as a reorganization under section 368(a). Section 1.3682 provides guidance regarding whether a transaction satisfies the explicit statutory requirements of a particular reorganization. Specifically, section 1.3682(k) provides that a transaction otherwise qualifying as a reorganization will not be disqualified or recharacterized as a result of certain subsequent transfers of assets or stock described therein. The fact that a subsequent transfer of assets or stock is not described in Sec. 1.368 2(k) does not necessarily preclude reorganization qualification, but the overall transaction would then be subject to analysis under the step transaction doctrine.

Section 1.3682(k), as in effect prior to these final regulations, generally permits one or more postreorganization transfers (or successive transfers) of assets or stock, provided that the Continuity of Business Enterprise (COBE) requirement is satisfied and the transfer(s) qualify as ``distributions'' (as described in Sec. 1.368 2(k)(1)(i)) or ``other transfers'' (as described in Sec. 1.368 2(k)(1)(ii)). These final regulations amend those rules to clarify that a transfer to the former shareholders of the acquired corporation (other than a former shareholder that is also the acquiring corporation) or the surviving corporation, as the case may be, is not described in paragraph (k)(1) to the extent it constitutes the receipt by such shareholders of consideration for their proprietary interests in the acquired corporation or the surviving corporation, as the case may be. Any such transfer to the former shareholders following a transaction otherwise qualifying as a reorganization under section 368(a) calls into question whether the underlying transaction satisfies the continuity of interest requirement in Treas. Reg. Sec. 1.3681(e) as well as certain statutory limitations on permissible consideration (such as the ``solely for voting stock'' requirement in section 368(a)(1)(B) or (C)). Therefore, such transfers are outside the scope of the safe harbor protection afforded by these final regulations. Nevertheless, the safe harbor of Treas. Reg. Sec. 1.3682(k) continues to apply to transfers to the former shareholders that do not constitute consideration for their proprietary interests in the acquired corporation or the surviving corporation, as the case may be, such as certain prorata dividend distributions by the acquiring corporation following a reorganization. Moreover, the amendment provides that the limitation on the scope of Treas. Reg. 1.3682(k) does not apply to transfers to a shareholder that also is the acquiring corporation in the reorganization. Thus, the regulations continue to provide safe harbor protection to certain ``upstream'' reorganizations followed by a transfer of acquired assets. See, for example, Rev. Rul. 69617, 19692 CB 57.

In addition, these final regulations amend Sec. 1.3682(k) to clarify that the safe harbor shall not apply to a transfer by the former shareholders of the acquired corporation (other than a [[Page 26323]]
former shareholder that is also the acquiring corporation) or the surviving corporation, as the case may be, of consideration initially received in the potential reorganization to the issuing corporation or a person related to the issuing corporation (see definition of ``related person'' in Sec. 1.3681(e)).

Further, these final regulations revise the title of paragraph (k)(1)(ii) and the requirement in paragraph (k)(1)(ii)(A). These amendments are intended to clarify that a distribution to shareholders is not a transfer described in paragraph (k)(1)(ii) regardless of whether or not it is described in paragraph (k)(1)(i). Additionally, these final regulations amend paragraph (k)(1)(ii)(C) to clarify that a transfer is not described in paragraph (k)(1)(ii) if the acquired corporation, the acquiring corporation, or the surviving corporation, as the case may be, terminates its corporate existence for Federal income tax purposes in connection with the transfer.

Finally, conforming changes are made to the analysis in Examples 1, 6, 7, 8 and 9, and one clarifying change is made to the facts in Example 3.

Special Analyses

It has been determined that this Treasury decision is not a significant regulatory action as defined in Executive Order 12866. Therefore, a regulatory assessment is not required. It also has been determined that section 553(b) of the Administrative Procedure Act (5 U.S.C. chapter 5) does not apply to these regulations and, because these regulations do not impose a collection of information on small entities, the Regulatory Flexibility Act (5 U.S.C. chapter 6) does not apply. Therefore, a Regulatory Flexibility Analysis is not required. Pursuant to section 7805(f) of the Internal Revenue Code, these regulations have been submitted to the Chief Counsel for Advocacy of the Small Business Administration for comment on their impact on small businesses.

Drafting Information

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

Availability of IRS Documents

IRS revenue rulings, procedures, and notices cited in this preamble are made available by the Superintendent of Documents, U.S. Government Printing Office, Washington, DC 20402.

List of Subjects in 26 CFR Part 1

Income taxes, Reporting and recordkeeping requirements. Adoption of Amendments to the Regulations
Accordingly, 26 CFR part 1 is amended as follows:
PART 1INCOME TAXES
Paragraph 1. The authority citation for part 1 continues to read in part as follows:

Authority: 26 U.S.C. 7805 * * *
Par. 2. Section 1.3682(k) is revised to read as follows:
Sec. 1.3682 Definition of terms.
* * * * *
(k) Certain transfers of assets or stock in reorganizations(1) General rule. A transaction otherwise qualifying as a reorganization under section 368(a) shall not be disqualified or recharacterized as a result of one or more subsequent transfers (or successive transfers) of assets or stock, provided that the requirements of Sec. 1.3681(d) are satisfied and the transfer(s) are described in either paragraph (k)(1)(i) or (k)(1)(ii) of this section. However, this paragraph (k) shall not apply to a transfer to the former shareholders of the acquired corporation (other than a former shareholder that is also the acquiring corporation) or the surviving corporation, as the case may be, to the extent it constitutes the receipt of consideration for a proprietary interest in the acquired corporation or the surviving corporation, as the case may be. Similarly, this paragraph (k) shall not apply to a transfer by the former shareholders of the acquired corporation (other than a former shareholder that is also the acquiring corporation) or the surviving corporation, as the case may be, of consideration initially received in the potential reorganization to the issuing corporation or a person related to the issuing corporation (see definition of ``related person'' in Sec. 1.3681(e)).
(i) Distributions. One or more distributions to shareholders (including distribution(s) that involve the assumption of liabilities) are described in this paragraph (k)(1)(i) if
(A) The property distributed consists of
(1) Assets of the acquired corporation, the acquiring corporation, or the surviving corporation, as the case may be, or an interest in an entity received in exchange for such assets in a transfer described in paragraph (k)(1)(ii) of this section;
(2) Stock of the acquired corporation provided that such distribution(s) of stock do not cause the acquired corporation to cease to be a member of the qualified group (as defined in Sec. 1.368 1(d)(4)(ii)); or
(3) A combination thereof; and
(B) The aggregate of such distributions does not consist of (1) An amount of assets of the acquired corporation, the acquiring corporation (disregarding assets held prior to the potential reorganization), or the surviving corporation (disregarding assets of the merged corporation), as the case may be, that would result in a liquidation of such corporation for Federal income tax purposes; or (2) All of the stock of the acquired corporation that was acquired in the transaction.
(ii) Transfers Other Than Distributions. One or more other transfers are described in this paragraph (k)(1)(ii) if
(A) The transfer(s) do not consist of one or more distributions to shareholders;
(B) The property transferred consists of
(1) Part or all of the assets of the acquired corporation, the acquiring corporation, or the surviving corporation, as the case may be;
(2) Part or all of the stock of the acquired corporation, the acquiring corporation, or the surviving corporation, as the case may be, provided that such transfer(s) of stock do not cause such corporation to cease to be a member of the qualified group (as defined in Sec. 1.3681(d)(4)(ii)); or
(3) A combination thereof; and
(C) The acquired corporation, the acquiring corporation, or the surviving corporation, as the case may be, does not terminate its corporate existence for Federal income tax purposes in connection with the transfer(s).
(2) Examples. The following examples illustrate the application of this paragraph (k). Except as otherwise noted, P is the issuing corporation, and T is an unrelated target corporation. All corporations have only one class of stock outstanding. T operates a bakery that supplies delectable pastries and cookies to local retail stores. The acquiring corporate group produces a variety of baked goods for nationwide distribution. Except as otherwise noted, P owns all of the stock of S1 and 80 percent of the stock of S4, S1 owns 80 percent of the stock of S2 and 50 percent of the stock of S5, S2 owns 80 percent of the stock of S3, and S4 owns the remaining 50 percent of the stock of S5. The examples are as follows:

[[Page 26324]]

Example 1. Transfers of acquired assets to members of the qualified group after a reorganization under section 368(a)(1)(C). (i) Facts. Pursuant to a plan of reorganization, T transfers all of its assets to S1 solely in exchange for P stock, which T
distributes to its shareholders, and S1's assumption of T's liabilities. In addition, pursuant to the plan, S1 transfers all of the T assets to S2, and S2 transfers all of the T assets to S3. (ii) Analysis. Under this paragraph (k), the transaction, which otherwise qualifies as a reorganization under section 368(a)(1)(C), is not disqualified by the successive transfers of all of the T assets to S2 and from S2 to S3 because the transfers are not one or more distributions to shareholders, the transfers consist of part or all of the assets of the acquiring corporation, the acquiring corporation does not terminate its corporate existence for Federal income tax purposes in connection with the transfers, and the transaction satisfies the requirements of Sec. 1.3681(d).

Example 2. Distribution of acquired assets to a member of the qualified group after a reorganization under section 368(a)(1)(C). (i) Facts. Pursuant to a plan of reorganization, T transfers all of its assets to S1 solely in exchange for P stock, which T
distributes to its shareholders, and S1's assumption of T's liabilities. In addition, pursuant to the plan, S1 distributes half of the T assets to P, and P assumes half of the T liabilities. (ii) Analysis. Under this paragraph (k), the transaction, which otherwise qualifies as a reorganization under section 368(a)(1)(C), is not disqualified by the distribution of half of the T assets from S1 to P, or P's assumption of half of the T liabilities from S1, because the distribution consists of assets of the acquiring corporation, the distribution does not consist of an amount of S1's assets that would result in a liquidation of S1 for Federal income tax purposes (disregarding S1's assets held prior to the
acquisition of T), and the transaction satisfies the requirements of Sec. 1.3681(d).

Example 3. Indirect distribution of acquired assets to a member of the qualified group after a reorganization under section 368(a)(1)(C). (i) Facts. The facts are the same as Example 2, except that, instead of S1 distributing half of the T assets to P and having P assume half of the T liabilities, S1 contributes half of the T assets to newly formed S6, S6 assumes half of the T
liabilities, and S1 distributes all of the S6 stock to P.
(ii) Analysis. Under this paragraph (k), the transaction, which otherwise qualifies as a reorganization under section 368(a)(1)(C), is not disqualified by the transfer of half of the T assets to S6 and the distribution of the S6 stock to P because the transfer of half of the T assets to S6 is described in paragraph (k)(1)(ii) of this section, the distribution of the S6 stock to P is an indirect distribution of assets of the acquiring corporation, the
distribution does not consist of an amount of S1's assets that would result in a liquidation of S1 for Federal income tax purposes (disregarding S1's assets held prior to the acquisition of T), and the transaction satisfies the requirements of Sec. 1.3681(d).

Example 4. Distribution of acquired stock to a controlled partnership after a reorganization under section 368(a)(1)(B). (i) Facts. P owns 80 percent of the stock of S1, and an 80percent interest in PRS, a partnership. S4 owns the remaining 20percent interest in PRS. PRS owns the remaining 20 percent of the stock of S1. Pursuant to a plan of reorganization, the T shareholders transfer all of their T stock to S1 solely in exchange for P stock. In addition, pursuant to the plan, S1 distributes 90 percent of the T stock to PRS in redemption of 5 percent of the stock of S1 owned by PRS.
(ii) Analysis. Under this paragraph (k), the transaction, which otherwise qualifies as a reorganization under section 368(a)(1)(B), is not disqualified by the distribution of 90 percent of the T stock from S1 to PRS because the distribution consists of less than all of the stock of the acquired corporation that was acquired in the transaction, the distribution does not cause T to cease to be a member of the qualified group (as defined in Sec. 1.368
1(d)(4)(ii)), and the transaction satisfies the requirements of Sec. 1.3681(d).

Example 5. Transfer of acquired stock to a noncontrolled partnership. (i) Facts. Pursuant to a plan, the T shareholders transfer all of their T stock to S1 solely in exchange for P stock. In addition, as part of the plan, T distributes half of its assets to S1, S1 assumes half of the T liabilities, and S1 transfers the T stock to S2. S2 and U, an unrelated corporation, form a new partnership, PRS. Immediately thereafter, S2 transfers all of the T stock to PRS in exchange for a 50 percent interest in PRS, and U transfers cash to PRS in exchange for a 50 percent interest in PRS. (ii) Analysis. Under this paragraph (k), the transaction, which otherwise qualifies as a reorganization under section 368(a)(1)(B), is not disqualified by the distribution of half of the T assets from T to S1, or S1's assumption of half of the T liabilities from T, because the distribution consists of assets of the acquired corporation, the distribution does not consist of an amount of T's assets that would result in a liquidation of T for Federal income tax purposes, and the transaction satisfies the requirements of Sec. 1.3681(d). Further, this paragraph (k) describes the transfer of the acquired stock from S1 to S2, but does not describe the transfer of the acquired stock from S2 to PRS because such transfer causes T to cease to be a member of the qualified group (as defined in Sec. 1.3681(d)(4)(ii)). Therefore, the characterization of this transaction must be determined under the relevant provisions of law, including the step transaction doctrine. See Sec. 1.3681(a). The transaction fails to meet the control requirement of a
reorganization described in section 368(a)(1)(B) because immediately after the acquisition of the T stock, the acquiring corporation does not have control of T.

Example 6. Transfers of acquired assets to members of the qualified group after a reorganization under section 368(a)(1)(D). (i) Facts. P owns all of the stock of T. Pursuant to a plan of reorganization, T transfers all of its assets to S1 solely in exchange for S1 stock, which T distributes to P, and S1's
assumption of T's liabilities. In addition, pursuant to the plan, S 1 transfers all of the T assets to S2, and S2 transfers all of the T assets to S3.
(ii) Analysis. Under this paragraph (k), the transaction, which otherwise qualifies as a reorganization under section 368(a)(1)(D), is not disqualified by the successive transfers of all the T assets from S1 to S2 and from S2 to S3 because the transfers are not one or more distributions to shareholders, the transfers consist of part or all of the assets of the acquiring corporation, the acquiring corporation does not terminate its corporate existence for Federal income tax purposes in connection with the transfers, and the transaction satisfies the requirements of Sec. 1.3681(d).

Example 7. Transfer of stock of the acquiring corporation to a member of the qualified group after a reorganization under section 368(a)(1)(A) by reason of section 368(a)(2)(D). (i) Facts. Pursuant to a plan of reorganization, S1 acquires all of the T assets in the merger of T into S1. In the merger, the T shareholders receive solely P stock. Also, pursuant to the plan, P transfers all of the S1 stock to S4.
(ii) Analysis. Under this paragraph (k), the transaction, which otherwise qualifies as a reorganization under section 368(a)(1)(A) by reason of section 368(a)(2)(D), is not disqualified by the transfer of all of the S1 stock to S4 because the transfer is not a distribution to shareholders, the transfer consists of part or all of the stock of the acquiring corporation, the transfer does not cause S1 to cease to be a member of the qualified group (as defined in Sec. 1.3681(d)(4)(ii)), the acquiring corporation does not terminate its corporate existence for Federal income tax purposes in connection with the transfer, and the transaction satisfies the requirements of Sec. 1.3681(d).

Example 8. Transfer of acquired assets to a partnership after a reorganization under section 368(a)(1)(A) by reason of section 368(a)(2)(D). (i) Facts. Pursuant to a plan of reorganization, S1 acquires all of the T assets in the merger of T into S1. In the merger, the T shareholders receive solely P stock. In addition, pursuant to the plan, S1 transfers all of the T assets to PRS, a partnership in which S1 owns a 33\1/3\percent interest. PRS continues T's historic business. S1 does not perform active and substantial management functions as a partner with respect to PRS' business.
(ii) Analysis. Under this paragraph (k), the transaction, which otherwise qualifies as a reorganization under section 368(a)(1)(A) by reason of section 368(a)(2)(D), is not disqualified by the transfer of T assets from S1 to PRS because the transfer is not a distribution to shareholders, the transfer consists of part or all of the assets of the acquiring corporation, the acquiring
corporation does not terminate its corporate existence for Federal income tax purposes in connection with the transfers, and the transaction satisfies the requirements of Sec. 1.3681(d).

Example 9. Sale of acquired assets to a member of the qualified group after a reorganization under section 368(a)(1)(C). (i) Facts. Pursuant to a plan of reorganization, T transfers all of its assets to S1 in exchange for P stock, which T distributes to its
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shareholders, and S1's assumption of T's liabilities. In addition, pursuant to the plan, S1 sells all of the T assets to S5 for cash equal to the fair market value of those assets.
(ii) Analysis. Under this paragraph (k), the transaction, which otherwise qualifies as a reorganization under section 368(a)(1)(C), is not disqualified by the sale of all of the T assets from S1 to S5 because the transfer is not a distribution to shareholders, the transfer consists of part or all of the assets of the acquiring corporation, the acquiring corporation does not terminate its corporate existence for Federal income tax purposes in connection with the transfer, and the transaction satisfies the requirements of Sec. 1.3681(d).
(3) Effective/applicability dates. This paragraph (k) applies to transactions occurring on or after May 9, 2008, except that it does not apply to any transaction occurring pursuant to a written agreement which is binding before May 9, 2008, and at all times after that. * * * * *
Linda E. Stiff,
Deputy Commissioner for Services and Enforcement.

Approved: May 2, 2008.
Eric Solomon,
Assistant Secretary of the Treasury (Tax Policy).
[FR Doc. E810451 Filed 5808; 8:45 am]
BILLING CODE 483001P

FOR FURTHER INFORMATION CONTACT Mary W. Lyons, at (202) 622-7930 (not a tollfree number).