[Federal Register Volume 61, Number 247 (Monday, December 23, 1996)]
[Proposed Rules]
[Pages 67508-67510]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 96-32040]


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DEPARTMENT OF THE TREASURY

Internal Revenue Service

26 CFR Part 1

[REG-249819-96]
RIN 1545-AU67


Reorganizations; Receipt of Securities

AGENCY: Internal Revenue Service (IRS), Treasury.

ACTION: Notice of proposed rulemaking and notice of public hearing.

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SUMMARY: This document contains proposed regulations relating to the 
receipt, as part of a reorganization, of rights to acquire stock of a 
corporation that is a party to the reorganization. This document also 
provides notice of a public hearing on these regulations.

DATES: Written comments must be received by March 24, 1997. Requests to 
appear and outlines of topics to be discussed at the public hearing 
scheduled for March 25, 1997, must be received by March 4, 1997.

ADDRESSES: Send submissions to: CC:DOM:CORP:R [REG-249819-96], room 
5228, Internal Revenue Service, POB 7604, Ben Franklin Station, 
Washington, DC 20044. In the alternative, submissions may be hand 
delivered between the hours of 8 a.m. and 5 p.m. to: CC:DOM:CORP:R 
[REG-249819-96], Courier's Desk, Internal Revenue Service, 1111 
Constitution Avenue NW., Washington, DC., or, electronically, via the 
IRS Internet site at: http://www.irs.ustreas.gov/prod/tax_regs/
comments.html.
    The public hearing will be held in the Commissioner's Conference 
Room, room 3313, 1111 Constitution Avenue NW., Washington, DC.

FOR FURTHER INFORMATION CONTACT: Concerning the proposed regulations, 
Michael J. Danbury, (202) 622-7750; concerning submissions and the 
public hearing, Evangelista Lee at (202) 622-7190 (not toll-free 
numbers).

SUPPLEMENTARY INFORMATION:

Background

A. General Information

    This document contains proposed amendments to the Income Tax 
Regulations (26 CFR part 1) under sections 354, 355, and 356 of the 
Internal Revenue Code of 1986 (Code), relating to exchanges of stock 
and securities in certain reorganizations. In particular, the proposed 
regulations address the receipt, as part of a reorganization, of rights 
to acquire stock of a corporation that is a party to the 
reorganization.
    Section 354 generally provides for the nonrecognition of gain or 
loss from the exchange of stock or securities in a corporation that is 
a party to a reorganization for stock or securities in the same 
corporation or in another corporation that is a party to the 
reorganization. Gain realized on an exchange of securities is not 
recognized provided that the principal amount of the securities 
received does not exceed the principal amount of any securities 
surrendered pursuant to the plan of reorganization.
    Section 355 provides for the nonrecognition of gain or loss upon a 
distribution by a corporation with respect to its stock of stock in a 
controlled corporation, or an exchange of securities in a controlled 
corporation for its securities. As in the case of a transaction 
described in section 354, gain realized on an exchange of securities is 
not recognized provided that the principal amount of the securities 
received does not exceed the principal amount of the securities 
surrendered pursuant to the plan of reorganization.
    Section 356 provides rules for recognition of gain, but not loss, 
if a shareholder or security holder receives nonqualifying property 
(i.e., boot) as well as qualifying property in a transaction to which 
section 354 or 355 would otherwise apply. In particular, realized gain 
is recognized in an amount not in excess of the fair market value of 
the excess principal amount of the securities received over the 
principal amount of any securities surrendered as part of the plan of 
reorganization.

[[Page 67509]]

B. Existing Regulations

    Existing regulations under sections 354 and 355 provide that stock 
rights and stock warrants are not included in the term ``stock or 
securities.'' Prior to the promulgation of these regulations in 1955, 
the treatment of such instruments was unclear. Although the Supreme 
Court had held that stock warrants do not constitute ``stock'' for 
purposes of determining whether a transaction is a reorganization, the 
Board of Tax Appeals had held that stock warrants did constitute 
``securities'' for purposes of section 112(b)(3) of the 1932 Act (a 
predecessor to section 354 of the Code). Compare Helvering v. Southwest 
Consolidated Corp., 315 U.S. 194 (1942), with Raymond v. Commissioner, 
37 B.T.A. 423 (1938).
    Since 1955, courts have avoided concluding whether stock rights or 
stock warrants constitute ``securities'' for purposes of sections 354 
and 355. See, e.g., Carlberg v. United States, 281 F.2d 507, 509 n.3 
(8th Cir. 1960); Bateman v. Commissioner, 40 T.C. 408 (1963); Estate of 
Smith v. Commissioner, 63 T.C. 722 (1975).

C. Reasons for Change

    A purpose of the reorganization provisions of the Code is to defer 
the recognition of gain and loss in certain readjustments of corporate 
structure. Generally, the Code extends nonrecognition to an exchange of 
stock which effects only a readjustment of continuing interest in 
modified corporate form. Although a right to acquire stock is not 
stock, the IRS and Treasury believe that it may generally represent a 
form of investment in the capital structure of the corporation that 
justifies nonrecognition treatment as a security under sections 354 and 
355. Other provisions of the Code expressly acknowledge the role that 
stock rights play in the capital structure of a corporation. See, e.g., 
sections 317 and 1032. Accordingly, the proposed regulations provide 
that for purposes of sections 354 and 355 the term securities includes 
``rights to acquire stock'' issued by a corporation that is a party to 
a reorganization.

Explanation of Provisions

A. Scope of Proposed Rules

    The proposed regulations treat rights to acquire stock issued by a 
corporation that is a party to a reorganization as securities of the 
corporation. For this purpose, the term ``rights to acquire stock'' of 
an issuing corporation has the same meaning as the term has in sections 
305(d)(1) and 317(a). It does not include rights exercisable against 
persons other than the issuer of the stock, or rights that relate to 
property other than stock of the issuer of the rights. As under current 
law, a conversion privilege contained in a stock or debt instrument 
generally will not be considered a separate property right received as 
part of the reorganization. See Rev. Rul. 69-265 (1969-1 C.B. 109).

B. Consequences Upon Receipt of Stock Rights

    For purposes of sections 354, 355 and 356, the proposed regulations 
treat rights to acquire stock as securities having no principal amount. 
As a result, a taxpayer will not be required to recognize any gain 
under section 356 upon the receipt of a stock right. This will 
generally be the case regardless of whether the taxpayer surrenders 
stock, stock rights, or debt securities.

C. Effect on Other Authorities

    The proposed rules apply only for the purpose of determining the 
amount of gain to be recognized in connection with exchanges occurring 
pursuant to transactions otherwise qualifying under section 368 or 355. 
They do not address issues concerning the qualification of a 
transaction under section 368 or 355. For example, the proposed rules 
do not permit rights to acquire stock to be taken into account in 
determining continuity of shareholder interest. See Southwest 
Consolidated Corp. (stock options are not stock).
    The proposed rules have no effect on other Code provisions 
governing the treatment of stock options or similar interests for other 
purposes. Thus, for example, the treatment of an instrument under these 
rules is not relevant in determining whether the holder of the 
instrument is treated as holding stock of the issuer for various 
purposes. See, e.g., sections 318(a)(4), 382(k)(6), and 1504(a)(5). 
Similarly, an instrument treated as a stock right under these rules may 
be subject to special rules under other provisions of the Code or 
regulations relating to compensation related stock options. See, e.g., 
sections 83 and 421-424 and the regulations thereunder. Nor is any 
inference intended as to the treatment of an exchange, substitution, or 
assumption of such options under current law.

D. Proposed Effective Dates

    The proposed regulations change a long-standing regulatory 
position. To afford taxpayers the opportunity to plan for the change, 
these regulations are proposed to be effective 60 days after the 
Treasury decision adopting these rules as final regulations is filed 
with the Office of the Federal Register.

E. Comments Regarding Need for Further Guidance

    Comments are requested as to whether additional guidance is needed 
with respect to the scope of these regulations and the general 
treatment of rights to acquire stock. For example, comments are invited 
with respect to: the need for additional guidance or special rules to 
address transactions involving exchanges, substitutions, or assumptions 
of compensation related stock options; the application of section 306 
to the transfer of a right to acquire common stock if the right is 
received tax-free pursuant to section 305 or 354; whether section 302 
should apply to the cash settlement or repurchase of a stock right, for 
example by treating the holder as having purchased the stock pursuant 
to the terms of the right and the issuer as having then redeemed that 
stock for cash; and any other administrative guidance which may be 
helpful in light of these proposed rules, including suggestions as to 
existing revenue rulings or revenue procedures that should be modified, 
reconsidered, or revoked. Note that comments outside of the scope of 
these regulations will be considered as suggestions for other future 
guidance.

Special Analyses

    It has been determined that this notice of proposed rulemaking is 
not a significant regulatory action as defined in Executive Order 
12866. Therefore, a regulatory assessment is not required. It has also 
been determined that section 553(b) of the Administrative Procedure Act 
(5 U.S.C. chapter 5) does not apply to these regulations. Because the 
regulation does not impose a collection of information on small 
entities, the Regulatory Flexibility Act (5 U.S.C. chapter 6) does not 
apply. Pursuant to section 7805(f) of the Code, this notice of proposed 
rulemaking will be submitted to the Chief Counsel for Advocacy of the 
Small Business Administration for comment on its impact on small 
business.

Comments and Public Hearing

    Before these proposed regulations are adopted as final regulations, 
consideration will be given to any comments submitted timely (in the 
manner described under the ADDRESSES caption) to the IRS. All comments 
will be available for public inspection and copying.
    A public hearing is scheduled for March 25, 1997, at 10 a.m., in 
the Commissioner's Conference Room, room

[[Page 67510]]

3313. Because of access restrictions, visitors will not be admitted 
beyond the Internal Revenue Building lobby more than 15 minutes before 
the hearing starts.
    The rules of 26 CFR 601.601(a)(3) apply to the hearing.
    Persons who wish to present oral comments at the hearing must 
submit an outline of the topics to be discussed by March 4, 1997.
    A period of 10 minutes will be allotted to each person for making 
comments.
    An agenda showing the scheduling of the speakers will be prepared 
after the deadline for receiving outlines has passed. Copies of the 
agenda will be available free of charge at the hearing.

Drafting Information

    The principal author of these regulations is David B. Friedel, 
formerly of the Office of Assistant Chief Counsel (Corporate). However, 
other personnel from the IRS and Treasury Department participated in 
their development.

List of Subjects in 26 CFR Part 1

    Income taxes, Reporting and recordkeeping requirements.

Proposed Amendments to the Regulations

    Accordingly, 26 CFR part 1 is proposed to be amended as follows:

PART 1--INCOME 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 1.354-1 is amended by revising paragraph (e) to read 
as follows:


Sec. 1.354-1  Exchanges of stock and securities in certain 
reorganizations.

* * * * *
    (e) For purposes of section 354, the term securities includes 
rights issued by a party to the reorganization (the issuing 
corporation) to acquire its stock. For purposes of this section and 
section 356(d)(2)(B), a right to acquire stock has no principal amount. 
This paragraph (e) applies to exchanges occurring on or after the day 
that is 60 days after the Treasury decision adopting these regulations 
is filed with the Federal Register.
    Par 3. Section 1.355-1 is amended by removing the last sentence of 
paragraph (b) and adding paragraph (c) to read as follows:


Sec. 1.355-1  Distribution of stock and securities of a controlled 
corporation.

* * * * *
    (c) Stock rights. For purposes of section 355, the term securities 
includes rights to acquire the stock of the distributing corporation or 
the controlled corporation (the issuing corporation). For purposes of 
this section and section 356(d)(2)(B), a right to acquire stock has no 
principal amount. This paragraph (c) applies to distributions occurring 
on or after the day that is 60 days after the Treasury decision 
adopting these regulations is filed with the Federal Register.
    Par 4. Section 1.356-3 is amended by:
    1. Redesignating existing paragraph (b) as paragraph (c).
    2. Adding a new paragraph (b) to read as follows:


Sec. 1.356-3  Rules for treatment of securities as ``other property''.

* * * * *
    (b) For purposes of this section, a right to acquire stock of the 
issuing corporation is treated as a security with no principal amount. 
Thus, such right is not other property when received in a transaction 
to which section 356 applies (regardless of whether securities are 
surrendered in the exchange). This paragraph (b) applies to 
transactions occurring on or after the day that is 60 days after the 
Treasury decision adopting these regulations is filed with the Federal 
Register.
* * * * *
Margaret Milner Richardson,
Commissioner of Internal Revenue.
[FR Doc. 96-32040 Filed 12-20-96; 8:45 am]
BILLING CODE 4830-01-U