[Federal Register Volume 63, Number 3 (Tuesday, January 6, 1998)]
[Rules and Regulations]
[Pages 411-412]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 98-4]



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DEPARTMENT OF THE TREASURY

Internal Revenue Service

26 CFR Part 1

[TD 8753]
RIN 1545-AV85


Reorganizations; Nonqualified Preferred Stock

AGENCY: Internal Revenue Service (IRS), Treasury.

ACTION: Temporary regulations.

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SUMMARY: This document contains a temporary regulation providing 
guidance under section 356(e) of the Internal Revenue Code (Code) on 
when nonqualified preferred stock (as defined in section 351(g)(2)) 
will not be treated as stock or securities for purposes of sections 
354, 355, and 356 of the Code. The guidance also addresses the 
treatment of the receipt of a right to acquire nonqualified preferred 
stock. The temporary regulation provides that in some circumstances the 
terms stock and securities will not include nonqualified preferred 
stock, or a right to acquire such stock, when received in exchange for 
stock or rights to acquire stock. The text of this temporary regulation 
also serves as the text of the proposed regulation set forth in the 
notice of proposed rulemaking on this subject in the Proposed Rules 
section of this issue of the Federal Register.

DATES: This regulation is effective March 9, 1998.

FOR FURTHER INFORMATION CONTACT: Concerning the temporary regulation, 
Michael J. Danbury, (202) 622-7750 (not a toll-free number).

SUPPLEMENTARY INFORMATION:

Background and Explanation of Provisions

A. In General

    This document contains a temporary regulation under section 356(e) 
of the Internal Revenue Code as added by section 1014 of the Taxpayer 
Relief Act of 1997 (TRA of 1997), Public Law 105-34. Section 1014 of 
the TRA of 1997, enacted on August 5, 1997, amended sections 351, 354, 
355, 356, and 1036 of the Code. As amended, sections 354, 355, and 356, 
in general, provide that nonqualified preferred stock (as defined in 
section 351(g)(2)) received in exchange for stock other than 
nonqualified preferred stock will not be treated as stock or securities 
but, instead, will be treated as ``other property'' or ``boot.'' As a 
result, unless the transition rule of section 1014(f)(2) of TRA of 1997 
or another exception applies, the receipt of nonqualified preferred 
stock will result in gain recognition.
    Section 351(g)(4) provides authority to issue regulations 
coordinating the rules for nonqualified preferred stock with other 
provisions of the Code. In connection with the issuance of final 
regulations treating certain rights to acquire stock as securities 
which can be received tax-free under sections 354, 355, and 356 (see 
Secs. 1.354-1(e), 1.355-1(c), and 1.356-3(b) (TD 8752) also published 
in the Rules and Regulations section of this issue of the Federal 
Register), the IRS and Treasury became aware that additional rules were 
needed to address the treatment of rights to acquire nonqualified 
preferred stock to coordinate with new sections 354(a)(2)(C), 
355(a)(3)(D), and 356(e). Accordingly, this temporary regulation 
provides that, notwithstanding Secs. 1.354-1(e), 1.355-1(c), and 1.356-
3(b), a right to acquire nonqualified preferred stock received in 
exchange for stock other than nonqualified preferred stock (or for a 
right to acquire stock other than nonqualified preferred stock) will 
not be treated as a security, and that nonqualified preferred stock 
received in exchange for stock other than nonqualified preferred stock 
(or for a right to acquire stock other than nonqualified preferred 
stock) will not be treated as stock or a security.
    This regulation does not attempt to address all questions and 
issues that may arise regarding the exchange or receipt of nonqualified 
preferred stock. The IRS and Treasury recognize that further guidance 
is necessary on these matters and intend to provide it in the future. 
Accordingly, comments are requested not only on these temporary and 
proposed regulations, but also with regard to the types of guidance 
needed and other issues under section 351(g) and the related 
provisions.

B. Effective Date

    Except as provided in section 1014(f)(2) of TRA of 1997, this 
temporary regulation applies to nonqualified preferred stock (or a 
right to acquire such stock) received in connection with a transaction 
occurring on or after March 9, 1998.

Special Analyses

    It has been determined that this Treasury decision 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 this regulation. 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 Internal Revenue Code, the notice of proposed 
rulemaking accompanying this regulation is being sent to the Small 
Business Administration for comment on its impact on small business.
    Drafting Information: The principal author of this regulation is 
Michael J. Danbury of the Office of Assistant Chief Counsel 
(Corporate). However, other personnel from the IRS and Treasury 
Department participated in its development.

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 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 1.356-6T is added to read as follows:


Sec. 1.356-6T  Rules for treatment of nonqualified preferred stock as 
``other property'' (temporary).

    (a) In general. For purposes of Secs. 1.354-1(e), 1.355-1(c), and 
1.356-3(b), the terms stock and securities do not include--
    (1) Nonqualified preferred stock, as defined in section 351(g)(2), 
received in exchange for (or in a distribution with respect to) stock, 
or a right to acquire stock, other than nonqualified preferred stock; 
or
    (2) A right to acquire such nonqualified preferred stock, received 
in exchange for (or in a distribution with respect to) stock, or a 
right to acquire stock, other than nonqualified preferred stock.
    (b) Exceptions. The following exceptions apply:
    (1) Certain recapitalizations. Paragraph (a) of this section does 
not apply in the case of a recapitalization under section 368(a)(1)(E) 
of a family-owned corporation as described in section 
354(a)(2)(C)(ii)(II).
    (2) Transition rule. Paragraph (a) of this section does not apply 
to a transaction described in section 1014(f)(2) of the Taxpayer Relief 
Act of 1997 (111 Stat. 921).
    (c) Effective date. This section applies to nonqualified preferred 
stock, or a

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right to acquire such stock, received in connection with a transaction 
occurring on or after March 9, 1998.
Michael P. Dolan,
Deputy Commissioner of Internal Revenue.

    Approved: December 17, 1997.
Donald C. Lubick,
Acting Assistant Secretary of the Treasury.
[FR Doc. 98-4 Filed 1-5-98; 8:45 am]
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