[Federal Register Volume 65, Number 98 (Friday, May 19, 2000)]
[Rules and Regulations]
[Pages 31805-31806]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 00-12406]


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DEPARTMENT OF THE TREASURY

Internal Revenue Service

26 CFR Part 1

[TD 8885]
RIN 1545-AW55


The Solely for Voting Stock Requirement in Certain Corporate 
Reorganizations

AGENCY: Internal Revenue Service (IRS), Treasury.

ACTION: Final regulation.

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SUMMARY: This document contains final regulations relating to the 
solely for voting stock requirement in certain corporate 
reorganizations under section 368(a)(1)(C). The final regulations 
provide that a prior acquisition of a target corporation's stock by an 
acquiring corporation generally will not prevent the solely for voting 
stock requirement in a ``C'' reorganization of the target corporation 
and the acquiring corporation from being satisfied. They affect persons 
engaging in certain transactions occurring after December 31, 1999.

DATES: Effective Date: These regulations are effective May 19, 2000.
    Applicability Date: These regulations apply to transactions 
occurring after December 31, 1999, unless the transaction occurs 
pursuant to a written agreement that is (subject to customary 
conditions) binding on that date and at all times thereafter.

FOR FURTHER INFORMATION CONTACT: Marnie Rapaport, (202) 622-7550 (not a 
toll-free number).

SUPPLEMENTARY INFORMATION:

Background

    On June 14, 1999, the IRS and Treasury issued a notice of proposed 
rulemaking in the Federal Register (64 FR 31770) setting forth rules 
relating to the solely for voting stock requirement in reorganizations 
under section 368(a)(1)(C). The proposed regulations provided that 
prior ownership of stock of a target corporation by an acquiring 
corporation will not by itself prevent the solely for voting stock 
requirement of a ``C'' reorganization from being satisfied. The 
regulations propose to reverse the IRS's previous position that the 
acquisition of assets of a partially controlled subsidiary does not 
qualify as a tax-free ``C'' reorganization. See Rev. Rul. 54-396 (1954-
2 C.B. 147). This position subsequently was sustained in litigation in 
Bausch & Lomb Optical Co. v. Commissioner, 267 F.2d 75 (2d Cir.), cert. 
denied, 361 U.S. 835 (1959) (the Bausch & Lomb doctrine). A public 
hearing regarding these proposed regulations was held on October 5, 
1999. Written comments to the notice were received. After consideration 
of all the comments, the proposed regulations are adopted as revised by 
this Treasury decision.

Explanation of Revisions and Summary of Comments

The Applicability Date

    The proposed regulations apply to transactions occurring after the 
date that a Treasury decision adopting the regulations is published in 
the Federal Register, except that they do not apply to any transactions 
occurring pursuant to a written agreement which is (subject to 
customary conditions) binding on the date that the regulations are 
published as final regulations in the Federal Register, and at all 
times thereafter.
    A commentator requested that taxpayers be allowed to apply the 
proposed regulations to transactions occurring before the proposed 
regulations are published as final regulations.
    The IRS and Treasury Department determined that the increased 
flexibility that results from the proposed regulations should be 
available to taxpayers in structuring transactions before their 
publication as final regulations. Accordingly, the IRS and the Treasury 
Department issued Notice 2000-1 (2000-2 I.R.B. 288), which changes the 
proposed effective date of the proposed regulations to apply to any 
transactions occurring after December 31, 1999, unless the transaction 
occurs pursuant to a written agreement binding on that date. Notice 
2000-1 further provides that the proposed regulations, when finalized, 
will adopt this effective date rule and that taxpayers may rely on 
Notice 2000-1 until final regulations are issued. Accordingly, the 
final regulations adopt this effective date rule.
    Finally, Notice 2000-1 provides that taxpayers may request a 
private letter ruling permitting them to apply the final regulations to 
transactions occurring on or after June 11, 1999 (the date the proposed 
regulations were filed with the Federal Register) to which the final 
regulations would not otherwise apply, and for which there was not a 
written agreement (subject to customary conditions) binding on June 11, 
1999 and at all times thereafter. The Notice cautions, however, that a 
private letter ruling will not be issued unless the taxpayer 
establishes to the satisfaction of the IRS that there is not a 
significant risk of different parties to the transaction taking 
inconsistent positions, for U.S. tax purposes, with respect to the 
applicability of the final regulations to the transaction. Any such 
requests for a ruling will continue to be considered.

Extension of the Repeal of the Bausch & Lomb Doctrine to ``B'' 
Reorganizations

    A comment was received requesting that the IRS reconsider its 
position in Rev. Rul. 69-294 (1969-1 C.B. 110), where the Bausch & Lomb 
doctrine was applied to disqualify a purported section 368(a)(1)(B) 
reorganization that followed a tax-free section 332 liquidation. In 
Rev. Rul. 69-294, X owned all of the stock of Y and Y owned 80 percent 
of the stock of Z. Y completely liquidated into X in a section 332 
liquidation. As part of the plan, X (now owning 80 percent of the stock 
of Z) acquired the minority 20 percent stock interest in Z in exchange 
for X voting stock in a purported ``B'' reorganization. The ruling 
holds that the exchange with the 20 percent minority shareholders was 
not a ``B'' reorganization. The rationale is that although the 
acquisition from the

[[Page 31806]]

minority shareholders was ``solely for voting stock,'' the liquidation 
of Y, as part of the same plan, resulted in X acquiring 80 percent of 
the Z stock in exchange for Y stock surrendered back to Y on the 
liquidation of Y and not solely in exchange for X voting stock.
    The commentator's suggestion is beyond the scope of this 
regulations project, which relates to ``C'' reorganizations. In light 
of these regulations, however, the IRS and Treasury Department may 
reconsider Rev. Rul. 69-294.

Effect on Other Documents

    The following publication is obsolete as of January 1, 2000: Rev. 
Rul. 54-396 (1954-2 C.B. 147).

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 were submitted to the Chief Counsel for Advocacy of the 
Small Business Administration for comment on its impact on small 
business.
    Drafting Information: The principal author of these regulations is 
Marnie Rapaport of the Office of the Assistant Chief Counsel 
(Corporate), IRS. 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.

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 1.368-2 is amended by adding paragraph (d)(4) to 
read as follows:


Sec. 1.368-2  Definition of terms.

* * * * *
    (d) * * *
    (4)(i) For purposes of paragraphs (d)(1) and (2)(ii) of this 
section, prior ownership of stock of the target corporation by an 
acquiring corporation will not by itself prevent the solely for voting 
stock requirement of such paragraphs from being satisfied. In a 
transaction in which the acquiring corporation has prior ownership of 
stock of the target corporation, the requirement of paragraph 
(d)(2)(ii) of this section is satisfied only if the sum of the money or 
other property that is distributed in pursuance of the plan of 
reorganization to the shareholders of the target corporation other than 
the acquiring corporation and to the creditors of the target 
corporation pursuant to section 361(b)(3), and all of the liabilities 
of the target corporation assumed by the acquiring corporation 
(including liabilities to which the properties of the target 
corporation are subject), does not exceed 20 percent of the value of 
all of the properties of the target corporation. If, in connection with 
a potential acquisition by an acquiring corporation of substantially 
all of a target corporation's properties, the acquiring corporation 
acquires the target corporation's stock for consideration other than 
the acquiring corporation's own voting stock (or voting stock of a 
corporation in control of the acquiring corporation if such stock is 
used in the acquisition of the target corporation's properties), 
whether from a shareholder of the target corporation or the target 
corporation itself, such consideration is treated, for purposes of 
paragraphs (d)(1) and (2) of this section, as money or other property 
exchanged by the acquiring corporation for the target corporation's 
properties. Accordingly, the transaction will not qualify under section 
368(a)(1)(C) unless, treating such consideration as money or other 
property, the requirements of section 368(a)(2)(B) and paragraph 
(d)(2)(ii) of this section are met. The determination of whether there 
has been an acquisition in connection with a potential reorganization 
under section 368(a)(1)(C) of a target corporation's stock for 
consideration other than an acquiring corporation's own voting stock 
(or voting stock of a corporation in control of the acquiring 
corporation if such stock is used in the acquisition of the target 
corporation's properties) will be made on the basis of all of the facts 
and circumstances.
    (ii) The following examples illustrate the principles of this 
paragraph (d)(4):

    Example 1. Corporation P (P) holds 60 percent of the Corporation 
T (T) stock that P purchased several years ago in an unrelated 
transaction. T has 100 shares of stock outstanding. The other 40 
percent of the T stock is owned by Corporation X (X), an unrelated 
corporation. T has properties with a fair market value of $110 and 
liabilities of $10. T transfers all of its properties to P. In 
exchange, P assumes the $10 of liabilities, and transfers to T $30 
of P voting stock and $10 of cash. T distributes the P voting stock 
and $10 of cash to X and liquidates. The transaction satisfies the 
solely for voting stock requirement of paragraph (d)(2)(ii) of this 
section because the sum of $10 of cash paid to X and the assumption 
by P of $10 of liabilities does not exceed 20% of the value of the 
properties of T.
    Example 2. The facts are the same as in Example 1 except that P 
purchased the 60 shares of T for $60 in cash in connection with the 
acquisition of T's assets. The transaction does not satisfy the 
solely for voting stock requirement of paragraph (d)(2)(ii) of this 
section because P is treated as having acquired all of the T assets 
for consideration consisting of $70 of cash, $10 of liability 
assumption and $30 of P voting stock, and the sum of $70 of cash and 
the assumption by P of $10 of liabilities exceeds 20% of the value 
of the properties of T.

    (iii) This paragraph (d)(4) applies to transactions occurring after 
December 31, 1999, unless the transaction occurs pursuant to a written 
agreement that is (subject to customary conditions) binding on that 
date and at all times thereafter.
* * * * *

David A. Mader,
Acting Deputy Commissioner of Internal Revenue.
    Approved: May 9, 2000.
Jonathan Talisman,
Deputy Assistant Secretary of the Treasury.
[FR Doc. 00-12406 Filed 5-18-00; 8:45 am]
BILLING CODE 4830-01-P