[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.

[[Page 364]]

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