[Federal Register Volume 62, Number 2 (Friday, January 3, 1997)]
[Proposed Rules]
[Pages 361-365]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 97-83]
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DEPARTMENT OF THE TREASURY
Internal Revenue Service
26 CFR Part 1
[REG-252233-96]
RIN 1545-AU73
Continuity of Interest and Business Enterprise
AGENCY: Internal Revenue Service (IRS), Treasury.
ACTION: Notice of proposed rulemaking and notice of public hearing.
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SUMMARY: This document proposes rules providing that for certain
reorganizations, transfers by the acquiring corporation of target
assets or stock to certain controlled corporations, and under
prescribed conditions, transfers of target assets to partnerships, will
not disqualify the transaction from satisfying the continuity of
interest and continuity of business enterprise requirements. This
document also provides notice of a public hearing on these proposed
regulations.
DATES: Comments must be received by April 3, 1997. Requests to speak
and outlines of topics to be discussed at the public hearing scheduled
for Wednesday, May 7, 1997 must be received by Wednesday, April 16,
1997.
ADDRESSES: Send submissions to: CC:DOM:CORP:R (REG-252233-96), room
5228, Internal Revenue Service, POB 7604, Ben Franklin Station,
Washington, DC 20044. Submissions may be hand delivered between the
hours of 8 a.m. and 5 p.m. to CC:DOM:CORP:R (REG-252233-96), Courier's
Desk, Internal Revenue Service, 1111 Constitution Avenue, NW.,
Washington, DC. Alternatively, taxpayers may submit comments
electronically via the Internet by selecting the ``Tax Regs'' option on
the IRS Home Page, or by submitting comments directly to the IRS
Internet site at http://www.irs.ustreas.gov/prod/tax__regs/
comments.html. The public hearing will be held in the Auditorium,
Internal Revenue Building, 1111 Constitution Avenue NW., Washington DC.
[[Page 362]]
FOR FURTHER INFORMATION CONTACT: Concerning the regulations, Marlene
Peake Oppenheim, (202) 622-7750; concerning submissions and the
hearing, Christina Vasquez, (202) 622-6808 (not toll-free numbers).
SUPPLEMENTARY INFORMATION:
Background
This document contains proposed amendments to the Income Tax
Regulations (26 CFR part 1) under section 368. The proposed regulations
establish rules providing that for certain reorganizations transfers by
the acquiring corporation of target corporation assets or stock to
certain controlled corporations and under prescribed conditions
transfers of target assets to partnerships, will not disqualify the
transaction from satisfying the continuity of interest and continuity
of business enterprise requirements.
Explanation of Proposed Regulations
A. Remote Continuity of Interest
1. Overview
The Internal Revenue Code of 1986 (Code) provides general
nonrecognition treatment for reorganizations specifically described in
section 368 of the Code. Literal compliance with the statutory
requirements is not sufficient, however, for nonrecognition treatment.
The Supreme Court, in Groman v. Commissioner, 302 U.S. 82 (1937),
and Helvering v. Bashford, 302 U.S. 454 (1938), established the basis
of what has become known as the ``remote continuity of interest
doctrine.'' Under this doctrine, stock consideration received by the
target corporation's (T) shareholders does not provide continuity
unless the target assets or stock are ultimately held by the
corporation that issued the stock. Thus, if T transfers its assets to
an acquiring corporation (P), in exchange for stock of the corporation
controlling P (see Groman), or if P acquires the T assets but pursuant
to the plan of reorganization transfers them to a controlled subsidiary
(S) (see Bashford), the continuity of interest requirement is not
satisfied.
Congress has substantially limited the remote continuity of
interest doctrine. In 1954, Congress enacted section 368(a)(2)(C) which
provides that P's transfer of T assets acquired in a reorganization
under section 368(a)(1)(A) (merger or consolidation) or section
368(a)(1)(C) (asset acquisition) to S does not disqualify the
reorganization. Section 368(a)(1)(C) was also amended to provide that P
can acquire T assets directly in exchange for voting stock of a
corporation in control of P (a triangular C reorganization).
In the 1960's, the Treasury Department and IRS issued several
revenue rulings attempting to clarify to what extent the remote
continuity doctrine had remaining vitality. Where the guidance held
that the remote continuity doctrine applied to disqualify the
transaction from reorganization treatment, Congress at times responded
by amending the relevant Code section and overturning the result. For
example, Rev. Rul. 63-234 (1963-2 C.B. 148) held that remote continuity
remained an issue for section 368(a)(1)(B) reorganizations. The
following year Congress responded by amending section 368(a)(1)(B),
permitting P to acquire T's stock in exchange for stock of the
corporation controlling P (a triangular B reorganization). Congress
also amended section 368(a)(2)(C) to provide that P can transfer T
stock acquired in a reorganization under section 368(a)(1)(B) to S
without disqualifying the reorganization.
Similarly, when Rev. Rul. 67-326 (1967-2 C.B. 143) held that a
merger of T into S in exchange for stock of the corporation controlling
S (a forward triangular merger) violated the continuity of interest
doctrine, Congress responded in the following year by enacting section
368(a)(2)(D), which provides that a forward triangular merger qualifies
as a section 368(a)(1)(A) reorganization.
In contrast, Rev. Rul. 64-73 (1964-1 C.B. 142) held that a
transaction qualified as a section 368(a)(1)(C) reorganization where P
and P's second tier subsidiary acquired all the T assets in exchange
for P stock. The transaction was viewed as an acquisition of
substantially all the T assets by P.
2. Transfers of T Assets or Stock to Controlled Corporations
The proposed regulations curtail the remote continuity of interest
doctrine by providing that assets can be transferred among members of a
``qualified group.'' A qualified group consists of one or more chains
of corporations connected through stock ownership with the ``issuing
corporation,'' but only if the issuing corporation owns directly stock
meeting the requirements of section 368(c) in at least one other
corporation, and stock meeting the requirements of section 368(c) in
each of the corporations (except the issuing corporation) is owned
directly by one of the other corporations. The issuing corporation is
the acquiring corporation (as that term is used in section 368(a)),
except in transactions where use of stock of a corporation in control
of the acquiring corporation is permitted. Where stock of the
controlling corporation is used, the controlling corporation is the
issuing corporation.
The proposed regulations generally permit transfers or successive
transfers of assets or stock to members of the qualified group. Thus,
continuity of interest is not violated where there are transfers or
successive transfers of T stock (or transfers of the T assets after a T
stock acquisition) or T assets (or transfers of the acquiring
corporation's stock after a T asset acquisition) among members of the
qualified group. The Treasury Department and IRS solicit comments on
whether the qualified group should be defined other than by reference
to section 368(c).
The proposed regulations are limited to asset or stock transfers
following transactions that otherwise qualify as section 368(a)(1) (A),
(B), (C), or (G) (meeting the requirements of sections 354(b)(1)(A) and
(B)) reorganizations (covered reorganizations). Section 368(a)(2)(C) by
its terms does not apply to acquisitive section 368(a)(1)(D) or section
368(a)(1)(F) reorganizations. The Treasury Department and IRS solicit
comments as to whether the rules in the proposed regulations should be
extended to these other reorganization provisions or to section 355
divisive transactions.
3. Transfer of T Assets to a Partnership
Whether the transfer of assets to a partnership (PRS) by the
corporate transferor partner (PTR) disqualifies an otherwise qualifying
covered reorganization depends in part on whether PRS is viewed as an
aggregate of its partners or as an entity separate from the partners.
The treatment of PRS as an aggregate or entity must be determined on
the basis of the characterization most appropriate for the situation.
H.R. Conf. Rep. No. 2543, 83d Cong., 2d Sess. 59 (1954). Cf.
Sec. 1.701-2(e)(1) of the Income Tax Regulations.
The Treasury Department and IRS believe it is appropriate to treat
PRS as an aggregate of its partners in analyzing a transaction with
respect to continuity of interest. Thus, the proposed regulations
provide that PTR's transfer of T assets to PRS does not violate the
continuity of interest requirement.
The proposed regulations do not permit the transfer of stock to PRS
where the Code imposes a control requirement in section 368. See
sections 368(a)(1)(B) and (C), sections 368(a)(2)(D) and (E), and
section 368(a)(2)(C). In addition, the transfer of
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T assets to PRS may violate the continuity of business enterprise
(COBE) requirement.
B. Continuity of Business Enterprise
1. Overview
Section 1.368-1(b) requires that reorganizations afford a
continuity of business enterprise under modified corporate form. COBE
requires that P either (i) continue T's historic business (business
continuity) or (ii) use a significant portion of T's historic business
assets in a business (asset continuity). Sec. 1.368-1(d)(2). The
proposed regulations provide a framework for applying the existing COBE
regulations to situations where the T assets or stock are transferred
to certain controlled corporations or assets are transferred to
partnerships.
2. Transfer of T Assets or Stock to a Controlled Corporation
The proposed regulations provide that, under prescribed conditions,
COBE is not violated by reason of the fact that part or all of the T
assets or stock are transferred among members of a qualified group.
Thus, the COBE requirement is not violated where there are transfers or
successive transfers of T stock (or transfers of the T assets after a T
stock acquisition) or T assets (or transfers of the acquiring
corporation's stock after a T asset acquisition) among members of the
qualified group.
3. Transfer of T Assets to a Partnership
The proposed regulations provide that, under prescribed conditions,
COBE is not violated by reason of the fact that part or all of the T
assets are transferred to PRS by PTR. The proposed regulations adopt an
aggregate approach in determining whether COBE has been satisfied when
T assets are transferred to PRS following a T asset or T stock
acquisition. Thus, the proposed regulations provide that for purposes
of the business continuity test, PTR will be treated as conducting a
business of PRS if PTR has active and substantial management functions
as a partner with regard to the business (cf. Rev. Rul. 92-17 (1992-1
C.B. 142)) or if PTR's partnership interest in PRS represents a
significant interest in the PRS business. Furthermore, in determining
whether PTR satisfies the asset continuity test (i) PTR will be treated
as owning the assets of PRS in accordance with PTR's interest in PRS,
and (ii) PTR will be treated as conducting a business of PRS under the
rules applicable to business continuity.
COBE requires a facts and circumstances analysis. Thus, the
proposed regulations also state that the fact that PTR meets the
business continuity requirements of Sec. 1.368-1(d)(2)(i) and 1(d)(3)
through active and substantial management of a PRS business tends to
establish COBE, but the fact that PTR conducts a PRS business is not
alone sufficient.
C. Effect on Other Authorities
The proposed regulations apply only for the purpose of determining
the effect that transfers of assets or stock following a reorganization
have on the continuity of interest and COBE requirements. They do not
address any other issues concerning the qualification of a transaction
as a reorganization.
Thus, the proposed regulations do not expand the scope of
triangular reorganizations. Under current law, a T asset or stock
acquisition in exchange for stock of a grandparent (or higher tier)
corporation does not qualify as a reorganization. See Rev. Rul. 74-564
(1974-2 C.B. 124) and Rev. Rul. 74-565 (1974-2 C.B. 125). The proposed
regulations do not change this result.
The proposed regulations do not provide guidance on whether the
``solely for voting stock'' requirement is satisfied in a section
368(a)(1)(C) reorganization when a corporation other than the acquiring
corporation assumes target liabilities. See generally Rev. Rul. 70-107
(1970-1 C.B. 78).
Furthermore, the proposed regulations do not modify the section 381
regulations which provide rules concerning which entity inherits the
tax attributes of T in an asset acquisition.
The Treasury Department and IRS solicit comments on these issues.
Proposed Effective Date
The revisions and additions in the proposed regulations apply to
transactions occurring after these regulations are published as final
regulations in the Federal Register, except that they shall not apply
to transactions occurring pursuant to a written agreement which is
(subject to customary conditions) binding on or before these
regulations are published as final regulations in the Federal Register.
Effect on Other Documents
The Treasury Department and IRS solicit comments on what IRS
publications should be modified or obsoleted when the proposed
regulations are published as final regulations.
Special Analyses
It has been determined that this notice of proposed rulemaking is
not a significant regulatory action as defined in EO 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, and because the
regulations do 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 Internal Revenue 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 written comments (a signed original
and eight copies) that are submitted timely to the Internal Revenue
Service. Alternatively, taxpayers may submit comments electronically
via the Internet by selecting the ``Tax Regs'' option on the IRS Home
Page, or by submitting comments directly to the IRS Internet site at
http://www.irs.ustreas.gov/prod/tax__regs/comments.html. All comments
will be available for public inspection and copying.
A public hearing has been scheduled for Wednesday, May 7, 1997,
beginning at 10 a.m., in the Auditorium, Internal Revenue Building,
1111 Constitution Avenue, NW., Washington, DC. 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
request to speak, and submit an outline of topics to be discussed and
the time to be devoted to each topic by Wednesday, April 16, 1997.
A period of 10 minutes will be allocated 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 the proposed regulations is Marlene Peake
Oppenheim of the Office of Assistant Chief Counsel (Corporate), IRS.
However, other personnel from the Treasury and IRS participated in
their development.
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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 1.368-1 as proposed to be amended at 61 FR 67514 is
amended by:
1. Adding two sentences after the sixth sentence of paragraph (b).
2. Redesignating paragraph (d)(5) as paragraph (d)(6).
3. Adding a new paragraph (d)(5).
4. Adding three sentences to the end of newly designated paragraph
(d)(6) introductory text.
5. Adding Example 6 through Example 10 to newly designated
paragraph (d)(6).
6. Adding paragraph (f).
The additions read as follows:
Sec. 1.368-1 Purpose and scope of exception of reorganization
exchanges.
* * * * *
(b) * * * Rules concerning continuity of interest as applied to
section 368(a)(1)(A), (B), (C), or (G) (meeting the requirements of
sections 354(b)(1)(A) and (B)) are in paragraph (f) of this section.
The preceding sentence applies to transactions occurring after these
regulations are published as final regulations in the Federal Register
except that it shall not apply to any transactions occurring pursuant
to a written agreement which is (subject to customary conditions)
binding on or before these regulations are published as final
regulations in the Federal Register. * * *
* * * * *
(d) * * *
(5) Transfers of assets or stock to controlled corporations and
partnerships--(i) Scope. The following rules in paragraphs (d)(5) (ii)
through (vi) of this section apply in determining whether the
continuity of business enterprise requirement of paragraph (d)(1) of
this section is satisfied with respect to transactions otherwise
qualifying as reorganizations under section 368(a)(1)(A), (B), (C), or
(G) (meeting the requirements of sections 354(b)(1)(A) and (B)).
(ii) Transfers to members of a qualified group. Continuity of
business enterprise continues to be satisfied where there are transfers
or successive transfers of target (T) stock (or transfers of T assets
after a stock acquisition) or T assets (or transfers of the acquiring
corporation's stock after a T asset acquisition) among members of a
qualified group as defined in paragraph (d)(5)(iii) of this section.
(iii) Qualified group. A qualified group is one or more chains of
corporations connected through stock ownership with the issuing
corporation as defined in paragraph (d)(5)(iv) of this section, but
only if the issuing corporation owns directly stock meeting the
requirements of section 368(c) in at least one other corporation, and
stock meeting the requirements of section 368(c) in each of the
corporations (except the issuing corporation) is owned directly by one
of the other corporations.
(iv) Issuing corporation. The issuing corporation is the acquiring
corporation (as that term is used in section 368(a)), except in
transactions where the use of stock of a corporation in control of the
acquiring corporation is permitted. Where stock of the controlling
corporation is used, the controlling corporation is the issuing
corporation.
(v) Partnerships--(A) For purposes of the business continuity test
of paragraph (d)(3) of this section, the corporate transferor partner
(PTR) will be treated as conducting a business of a partnership (PRS)
where--
(1) PTR has active and substantial management functions as a
partner with respect to the PRS business; or
(2) PTR's interest in PRS represents a significant interest in the
PRS business.
(B) For purposes of the asset continuity test of paragraph (d)(4)
of this section--
(1) PTR will be treated as owning the assets of PRS in accordance
with PTR's interest in PRS; and
(2) PTR will be treated as conducting a PRS business if PTR meets
the requirement of paragraph (d)(5)(v)(A) (1) or (2) of this section.
(C) The fact that PTR is treated as conducting a business of PRS
under paragraph (d)(5)(v)(A) of this section tends to establish the
requisite continuity, but is not alone sufficient.
(vi) This paragraph (d)(5) applies to transactions occurring after
these regulations are published as final regulations in the Federal
Register except that it shall not apply to any transactions occurring
pursuant to a written agreement which is (subject to customary
conditions) binding on or before these regulations are published as
final regulations in the Federal Register.
(6) * * * All corporations have only one class of common stock
outstanding. Example 6 through Example 10 of this paragraph (d)(6)
apply to transactions occurring after these regulations are published
as final regulations in the Federal Register except that they shall not
apply to any transactions occurring pursuant to a written agreement
which is (subject to customary conditions) binding on or before these
regulations are published as final regulations in the Federal Register.
The examples are as follows:
* * * * *
Example 6. Qualified group and business continuity. (a) Facts. T
operates a bakery which makes and supplies delectable pastries and
cookies to a few select locations. The acquiring corporate group
consists of numerous corporations which produce a variety of baked
goods for distribution around the world. Holding Company (HC) owns
80 percent of the stock of P. Pursuant to a plan, T transfers all of
its assets to P solely in exchange for HC voting stock, which T
distributes to its shareholders. P owns 80 percent of the stock of
S1; S1 owns 80 percent of the stock of S2, which also makes and
supplies pastries and cookies. To amalgamate the T business into
HC's affiliated group, P would like to operate T's business in S2.
Pursuant to the plan, P transfers the T assets to S1; S1 then
transfers the T assets to S2.
(b) Continuity of business enterprise. HC, P, S1, and S2 are
members of a qualified group as defined in paragraph (d)(5)(iii) of
this section. Under paragraph (d)(5)(ii) of this section, continuity
of business enterprise continues to be satisfied where T's historic
business is transferred to a member of the qualified group. The same
results would occur if T had been acquired by P for HC voting stock
in a reorganization described in section 368(a)(1)(B) and the T
stock had been transferred from P to S1 and from S1 to S2.
Example 7. Transfers of assets to multiple controlled
corporations. (a) Facts. T operates an auto parts distributorship.
Pursuant to a plan, T merges into P and the T shareholders receive
solely P stock. P owns 80 percent of the stock of S1. S1 owns 80
percent of the stock of ten subsidiaries, S2 through S11. S2 through
S11 each separately operate a full service gas station. As part of
the plan, P transfers T's auto parts to S1, which in turn transfers
some of the parts to each of its ten subsidiaries. No one subsidiary
receives a significant portion of T's historic business assets. Each
of S1's subsidiaries will use the T assets received in the operation
of its full service gas station. No S1 subsidiary will be an auto
parts distributor.
(b) Continuity of business enterprise. P, S1, and the respective
subsidiaries are members of a qualified group as defined in
paragraph (d)(5)(iii) of this section. Under paragraph (d)(5)(ii) of
this section, continuity of business enterprise continues to be
satisfied where all of T's historic business assets are transferred
among members of the qualified group. Even though no one corporation
is using a significant portion of T's historic
[[Page 365]]
business assets in a business, the continuity of business enterprise
requirement is satisfied because the qualified group is using a
significant portion of T's historic business assets in a business.
Example 8. Transfer of a historic T business to PRS--active and
substantial management. (a) Facts. T manufactures custom ski boots.
T transfers all of its assets to P solely in exchange for P voting
stock, which T then distributes to its shareholders. P plans to
continue manufacturing ski boots and to expand this operation. As
part of the expansion, P and R (an unrelated party) form a new
partnership (PRS). As part of the plan of reorganization, P (PTR)
transfers T's ski boot business to PRS in exchange for a 20 percent
interest in PRS. R transfers cash in exchange for its interest in
PRS. PTR performs active and substantial management functions for
PRS including the decision-making regarding significant business
decisions of PRS and regular participation in the overall
supervision, direction and control of the employees of PRS in
operating the ski boot business.
(b) Continuity of business enterprise. Under paragraph
(d)(5)(v)(A)(1) of this section, PTR is treated as conducting T's
historic business because the officers of PTR perform active and
substantial management functions for the ski boot business in PRS.
Thus, the continuity of business enterprise requirement is satisfied
because PTR is treated as continuing to conduct T's historic
business.
(c) Continuity of interest. Under paragraph (f)(1)(ii) of this
section, the continuity of interest requirement is satisfied even
though the assets are transferred to PRS in exchange for an interest
in PRS.
Example 9. Transfer of a historic T business to PRS--significant
interest. (a) Facts. The facts are the same as in Example 8 except
that PTR's officers do not operate the ski boot business, and PTR
owns a 33\1/3\ percent interest in PRS.
(b) Continuity of business enterprise. Under paragraph
(d)(5)(v)(A)(2) of this section, PTR is treated as conducting T's
historic ski boot business because PTR's 33\1/3\ percent interest in
PRS represents a significant interest in the PRS ski boot business.
(c) Continuity of interest. Under paragraph (f)(1)(ii) of this
section, the continuity of interest requirement is satisfied even
though the assets are transferred to PRS in exchange for an interest
in PRS.
Example 10. Transfer of T's historic assets to PRS. (a) Facts. T
manufactures silk. T transfers all of its assets to P solely in
exchange for P voting stock, which T then distributes to its
shareholders. P manufactures clothing and has been buying silk from
T. P (PTR) and R (an unrelated party) own interests in a partnership
(PRS) which owns and maintains warehouse facilities. As part of the
plan of reorganization, PTR transfers the T assets to PRS,
increasing PTR's percentage interest in PRS from 20 to 33\1/3\
percent. PTR decides to buy its silk from a different manufacturer
and converts T's plant facilities into warehouses.
(b) Continuity of business enterprise. Under paragraph
(d)(5)(v)(A)(2), PTR is treated as being in the business of owning
and maintaining warehouse space because of PTR's significant
interest in PRS. Furthermore, under paragraph (d)(5)(v)(B) of this
section, PTR is treated as owning the assets of PRS in accordance
with its interest in the partnership. Thus, the continuity of
business enterprise requirement is satisfied because PTR continues
to use a significant portion of T's historic assets in a business.
(c) Continuity of interest. Under paragraph (f)(1)(ii) of this
section, the continuity of interest requirement continues to be
satisfied even though the assets are transferred to PRS in exchange
for an interest in PRS.
* * * * *
(f) Continuity of interest and asset or stock transfers. (1)
Scope. The following rules apply to transactions otherwise
qualifying as a reorganization under section 368(a)(1)(A), (B), (C),
or (G) (meeting the requirements of sections 354(b)(1) (A) and (B)):
(i) Transfers to members of a qualified group. Continuity of
interest is satisfied where there are transfers or successive
transfers of target (T) stock (or transfers of T assets after a
stock acquisition) or T assets (or transfers of the acquiring
corporation's stock after a T asset acquisition) among members of a
qualified group as defined in paragraph (d)(5)(iii) of this section.
(ii) Partnerships. Continuity of interest is satisfied even
where T assets (or transfers of T assets following a T stock
acquisition) are transferred to a partnership in exchange for a
partnership interest.
(2) Example. The rules of this paragraph (f) are illustrated by
the following example. P represents the acquiring corporation and T
represents the target corporation. Also see Example 8 through
Example 10 in paragraph (d)(6) of this section.
The example is as follows:
Example. Transfers to corporations in the qualified group. (a)
Facts. T manufactures playground equipment, including launch ramps
and half pipes for skateboarding, in-line skating, and bicycling.
The P affiliated group is engaged in architectural design and
construction. A holding company (HC) owns 80 percent of the stock of
each of P and S1. S1 in turn, owns 80 percent of the stock of S2,
and S2 owns 80 percent of the stock of S3. T transfers all of its
assets to P in exchange for HC voting stock, which T distributes to
its shareholders. HC transfers all of the P stock to S1. S1 in turn
transfers all of the P stock to S2, and S2 transfers the P stock to
S3.
(b) Continuity of interest. HC, P, S1, S2 and S3 are members of
a qualified group as defined in paragraph (d)(5)(iii) of this
section. Under paragraph (f)(1)(i) of this section, the successive
transfers of the P stock to other members of the qualified group do
not violate the continuity of interest requirement.
Par. 3. In Sec. 1.368-2, paragraph (f) is amended by removing the
second sentence and adding two new sentences in its place to read as
follows:
Sec. 1.368-2 Definition of terms.
* * * * *
(f) * * * A corporation remains a party to the reorganization even
though assets are transferred among members of a qualified group as
defined in Sec. 1.368-1(d)(5)(iii). The preceding sentence applies to
transactions occurring after these regulations are published as final
regulations in the Federal Register except that it shall not apply to
any transactions occurring pursuant to a written agreement which is
(subject to customary conditions) binding on or before these
regulations are published as final regulations in the Federal Register.
* * *
* * * * *
Margaret Milner Richardson,
Commissioner of Internal Revenue.
[FR Doc. 97-83 Filed 1-2-97; 8:45 am]
BILLING CODE 4830-01-U