[Federal Register Volume 69, Number 41 (Tuesday, March 2, 2004)]
[Proposed Rules]
[Pages 9771-9774]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 04-4483]


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DEPARTMENT OF THE TREASURY

Internal Revenue Service

26 CFR Part 1

[REG-165579-02]
RIN 1545-BB80


Corporate Reorganizations; Transfers of Assets or Stock Following 
a Reorganization

AGENCY: Internal Revenue Service (IRS), Treasury.

ACTION: Notice of proposed rulemaking.

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SUMMARY: This document contains proposed regulations that provide 
guidance relating to the effect of certain asset and stock transfers on 
the qualification of certain transactions as reorganizations under 
section 368(a). This document also contains proposed regulations that 
provide guidance relating to the continuity of business enterprise 
requirement and the definition of a party to a reorganization. These 
regulations affect corporations and their shareholders.

DATES: Written or electronic comments and requests for a public hearing 
must be received by June 1, 2004.

ADDRESSES: Send submissions to CC:PA:LPD:PR (REG-165579-02), room 5203, 
Internal Revenue Service, POB 7604, Ben Franklin Station, Washington, 
DC 20044. Submissions may be hand delivered Monday through Friday 
between the hours of 8 a.m. and 4 p.m. to CC:PA:LPD:PR (REG-165579-02), 
Courier's Desk, Internal Revenue Service, 1111 Constitution Avenue, 
NW., Washington, DC. Alternatively, taxpayers may submit comments 
electronically to the IRS Internet site at http://www.irs.gov/regs.

FOR FURTHER INFORMATION CONTACT: Concerning the regulations, Rebecca O. 
Burch, (202) 622-7550; concerning submissions and the hearing, Sonya 
Cruse, (202) 622-4693 (not toll-free numbers).

SUPPLEMENTARY INFORMATION:

Background

    To quality as a reorganization under section 368 of the Internal 
Revenue Code, a transaction must satisfy certain statutory requirements 
and nonstatutory requirements, including continuity of business 
enterprise (COBE). Section 368(a)(2)(C) provides that a transaction 
otherwise qualifying as a reorganization under section 368(a)(1)(A), 
(B), (C), or (G) will not be disqualified by reason of the fact that 
part or all of the acquired assets or stock are transferred to a 
corporation controlled by the acquiring corporation.
    Section 354(a) provides that, in general, no gain or loss shall be 
recognized if stock or securities in a corporation a party to a 
reorganization are, in pursuance of the plan of reorganization, 
exchanged solely for stock or securities in such corporation or in 
another corporation a party to the reorganization. Section 368(b) 
provides that the term ``a party to a reorganization'' includes a 
corporation resulting from a reorganization, and both corporations, in 
the case of a reorganization resulting from the acquisition by one 
corporation of stock or properties of another. Section 368(b) further 
provides that, in the case of a reorganization qualifying under section 
368(a)(1)(B) or (C), if the stock exchanged for the stock or properties 
is stock of a corporation which is in control of the acquiring 
corporation, the term ``a party to a reorganization'' includes the 
corporation so controlling the acquiring corporation. In the case of a 
reorganization qualifying under section 368(a)(1)(A), (B), (C), or (G) 
by reason of section 368(a)(2)(C), the term ``a party to a 
reorganization'' includes the corporation controlling the corporation 
to which the acquired assets or stock are transferred. In the case of a 
reorganization qualifying under section 368(a)(1)(A) or (G) by reason 
of section 368(a)(2)(D), the term ``a party to a reorganization'' 
includes the controlling corporation. Finally, in the case of a 
reorganization qualifying under section 368(a)(1)(A) by reason of 
section 368(a)(2)(E), the term ``a party to a reorganization'' includes 
the controlling corporation.
    On January 28, 1998, final regulations providing guidance regarding 
the COBE requirement, the definition of ``a party to the 
reorganization,'' and the effect of certain transfers of acquired 
assets or stock on the qualification of a transaction as a 
reorganization under section 368(a)(1)(A), (B), (C), or (G) were 
published in the Federal Register (63 FR 4174). Sections 1.368-1(d) and 
1.368-2(f) and (k) were among those regulations.
    Section 1.368-1(d) generally provides that, for a transaction to 
satisfy the COBE requirement, the issuing corporation must either 
continue a significant historic business of the target corporation or 
use a significant portion of the target corporation's assets in a 
business. For this purpose, the term issuing corporation generally 
means the acquiring corporation, but, in the case of a triangular 
reorganization, it means the corporation in control of the acquiring 
corporation. In addition, the issuing corporation is treated as holding 
all of the businesses and assets of all of the members of the qualified 
group. For this purpose, the qualified group is 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.
    Section 1.368-2(f) provides that the term ``a party to a 
reorganization'' includes a corporation resulting from a 
reorganization, and both corporations in a transaction qualifying as a 
reorganization where one corporation acquires stock or properties of 
another corporation. In the case of a triangular reorganization, a 
corporation controlling an acquiring corporation is a party to the 
reorganization when the stock of such controlling corporation is used 
in the acquisition of properties. Section 1.368-2(f) further provides 
that, if a transaction otherwise qualifies as a reorganization, a 
corporation remains a party to the reorganization even though stock or 
assets acquired in the reorganization are transferred in a transaction 
described in Sec.  1.368-2(k).
    Section 1.368-2(k) provides that, except as otherwise provided, a 
transaction otherwise qualifying as a reorganization under section 
368(a)(1)(A), (B), (C), or (G) (where the requirements of sections 
354(b)(1)(A) and (B) are met) will not be disqualified

[[Page 9772]]

by reason of the fact that part or all of the assets or stock acquired 
in the transaction are transferred or successively transferred to one 
or more corporations controlled in each transfer by the transferor 
corporation. For this purpose, a corporation is a controlled 
corporation if the transferor corporation owns stock of such 
corporation constituting control within the meaning of section 368(c). 
Furthermore, a transaction qualifying under section 368(a)(1)(A) by 
reason of application of section 368(a)(2)(E) is not disqualified by 
reason of the fact that part or all of the stock of the surviving 
corporation is transferred or successively transferred to one or more 
corporations controlled in each transfer by the transferor corporation, 
or because part or all of the assets of the surviving corporation or 
the merged corporation are transferred or successively transferred to 
one or more corporations controlled in each transfer by the transferor 
corporation. Again, for this purpose a corporation is controlled by the 
transferor corporation if the transferor corporation owns stock of such 
corporation constituting control within the meaning of section 368(c).
    The preamble to the January 28, 1998, regulations explains that 
assets or stock acquired in certain reorganizations may be transferred 
among members of a qualified group, and in certain cases to 
partnerships, without preventing the reorganization from satisfying 
COBE. It also states that the IRS and Treasury Department believe that 
the COBE requirements adequately address the remote continuity of 
interest issues raised in Gorman v. Commissioner, 302 U.S. 82 (1937), 
and Helvering v. Bashford, 302 U.S. 454 (1938), and, therefore, that 
the final regulations do not separately articulate rules for remote 
continuity. The preamble also states that Sec.  1.368-1(d), being 
limited to a discussion of the COBE requirement, does not address 
satisfaction of the explicit statutory requirements of a 
reorganization, which is the subject of Sec.  1.368-2. Finally, the 
preamble states that no inference is to be drawn as to whether 
transactions not described in Sec.  1.368-2(k) otherwise qualify as 
reorganizations.
    In Rev. Rul. 2001-1 C.B. 1290, and Rev. Rul. 2002-85, 2002-52 
I.R.B. 986, the IRS addressed the effect of certain transfers not 
described in Sec.  1.368-2(k) on certain transactions that otherwise 
qualify as reorganizations. In Rev. Rul. 2001-24, the IRS considered 
whether a transfer of the stock of the acquiring corporation to a 
corporation wholly owned by the issuing corporation following a 
transaction that otherwise qualified as a reorganization under section 
368(a)(1)(A) by reason of section 368(a)(2)(D) (a forward triangular 
merger) prevented the transaction from qualifying as such. The IRS 
ruled that the transfer of stock of the acquiring corporation did not 
cause the issuing corporation to be treated as not in control of the 
acquiring corporation for purposes of section 368(a)(2)(D), and did not 
cause the issuing corporation to fail to be treated as a party to the 
reorganization. In arriving at these conclusions, the ruling notes that 
section 368(a)(2)(C) and Sec.  1.368-2(k) do not specifically address 
the facts of the ruling and section 368(a)(2)(C) does not preclude the 
transaction from qualifying as a reorganization. The ruling states 
that, by its terms, section 368(a)(2)(C) is a permissive, rather than 
an exclusive or restrictive, section. therefore, the transfer of 
acquiring corporation stock to the issuing corporation's wholly owned 
subsidiary did not prevent the transaction from qualifying as a forward 
triangular merger.
    In Rev. Rul. 2002-85, the IRS considered whether an acquiring 
corporation's transfer of acquired assets to a subsidiary controlled by 
the acquiring corporation would prevent the acquiring corporation's 
acquisition of those assets from qualifying as a reorganization under 
section 368(a)(1)(D). After noting that section 368(a)(2)(C) is 
permissive rather than exclusive or restrictive, the ruling reasons 
that, because Sec.  1.368-2(k) restates and interprets section 
368(a)(2)(C), Sec.  1.368-2(k) also should be viewed as permissive and 
not exclusive or restrictive. The ruling concludes that the absence of 
section 368(a)(1)(D) from Sec.  1.368-2(k) does not prevent a 
corporation from remaining a party to a reorganization even if the 
acquired stock or assets are transferred to a controlled subsidiary. 
The ruling states that, like reorganizations under sections 
368(a)(1)(A) and 368(a)(1)(C), reorganizations under section 
368(a)(1)(D) are asset reorganizations. In reorganizations under 
sections 368(a)(1)(A) and reorganizations under section 368(a)(1)(C), 
the original transferee is treated as a party to a reorganization, even 
if the acquired assets are transferred to a controlled subsidiary of 
the original transferee. Because the differences between 
reorganizations under section 368(a)(1)(D) on the one hand and 
reorganizations under sections 368(a)(1)(A) and (C) on the other hand 
do not warrant treating the original transferee in a transaction that 
otherwise satisfies the requirements of a reorganization under section 
368(a)(1)(D) differently from the original transferee in a 
reorganization under section 368(a)(1)(A) or (C) for purposes of 
section 368(b), the ruling concludes that the original transferee in a 
transaction that otherwise satisfies the requirements of a 
reorganization under section 368(a)(1)(D) is treated as a party to the 
reorganization, notwithstanding the original transferee's transfer of 
acquired assets to a controlled subsidiary of the original transferee. 
The ruling concludes that the transaction qualifies as a reorganization 
under section 368(a)(1)(D).

Explanation of Provisions

    As described above, in the regulations under section 368 and in 
revenue rulings, the IRS and Treasury Department have considered the 
effect of transfers of assets or stock to controlled corporations on 
the qualification of a transaction as a reorganization in a variety of 
situations not addressed by section 368(a)(2)(C). In each of these 
cases, the IRS and Treasury Department have concluded that the 
transfers did not cause the transaction to fail to qualify as a 
reorganization. These conclusions reflect the fact that, in all of the 
situations considered, the transactions, in form, satisfy the statutory 
requirements of a reorganization and, in substance, constitute 
readjustments of continuing interests in the reorganized business in 
modified corporate form. None of the transactions involve the transfer 
of the acquired stock or assets to a ``stranger,'' a result 
inconsistent with reorganization treatment. H.R. Rep. No. 83-1337, A134 
(1954).
    The IRS and Treasury believe that certain transfers of stock and 
assets to controlled corporations are consistent with reorganization 
treatment, even though in some cases the transfers involve a type of 
reorganization not included in section 368(a)(2)(C). The effect of 
transferring stock or assets to a controlled corporation on the 
qualification of a transaction as a reorganization should not depend on 
the specific reorganization provision at issue. Given that section 
368(a)(2)(C) was intended to be permissive rather than exclusive with 
respect to certain transfers of stock or assets to a controlled 
corporation following a transaction that would qualify as a 
reorganization without regard to the transfer, the IRS and Treasury 
believe it is appropriate to extend its principles to certain transfers 
of stock and assets after all types of reorganizations.
    Accordingly, these regulations propose to amend Sec.  1.368-2(k) to 
provide that a transaction otherwise

[[Page 9773]]

qualifying as a reorganization under section 368(a) will not be 
disqualified as a result of the transfer or successive transfers to one 
or more corporations controlled in each transfer by the transferor 
corporation of part or all of (i) the assets of any party to the 
reorganization, or (ii) the stock of any party to the reorganization 
other than the issuing corporation. In addition, these proposed 
regulations include amendments to the COBE regulations under Sec.  
1.368-1(d) and amendments to the definition of a party to a 
reorganization under Sec.  1.368-2(f) that reflect Sec.  1.368-2(k) as 
proposed.

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, and, because 
these regulations do not impost 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 businesses.

Comments and Requests for a Public Hearing

    Before these proposed regulations are adopted as final regulations, 
consideration will be given to any written (a signed original and 8 
copies) or electronic comments that are submitted timely to the IRS. 
The IRS and Treasury Department request comments on the clarity of the 
proposed rules and how they can be made easier to understand. All 
comments will be available for public inspection and copying. A public 
hearing will be scheduled if requested in writing by any person that 
timely submits written comments. If a public hearing is scheduled, 
notice of the date, time, and place for the public hearing will be 
published in the Federal Register

Drafting Information

    The principal author of these proposed regulations is Rebecca O. 
Burch of the Office of Associate 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

    1. The authority citation for part 1 continues to read in part as 
follows:

    Authority: 26 U.S.C. 7805 * * *.

    2. Section 1.368-1 is amended as follows:
    1. Paragraph (d)(4)(i) is redesignated as paragraph (d)(4)(i)(A) 
and revised.
    2. New paragraph (d)(4)(i)(B) is added.
    3. Paragraph (d)(5), introductory text, is redesignated as 
paragraph (d)(5)(i), and revised.
    4. In newly designated paragraph (d)(5)(i), Examples, 7, 8, 9, 10, 
11, and 12 are redesignated as Examples 8, 9, 10, 11, 12, and 13, 
respectively.
    5. In newly designated paragraph (d)(5)(i), the first sentence in 
redesignated Examples 9, 10, and 12 is revised.
    6. In newly designated paragraph (d)(5)(i), a new Example 7 is 
added.
    7. New paragraph (d)(5)(ii) is added.
    The revisions and additions read as follows:


Sec.  1.368-1  Purpose and scope of exception of reorganization 
exchanges.

* * * * *
    (d) * * *
    (4) * * *
    (i) Businesses and assets of members of a qualified group--(A) In 
general. The issuing corporation is treated as holding all of the 
businesses and assets of all of the members of the qualified group, as 
defined in paragraph (d)(4)(ii) of this section.
    (B) Special rule. The issuing corporation is treated as holding all 
of the businesses and assets of the surviving corporation after a 
reorganization that otherwise satisfies the requirements of a reverse 
triangular merger (as defined in Sec.  1.358-6(b)(2)(iii)), the 
acquired corporation after a reorganization that otherwise satisfies 
the requirements of section 368(a)(1)(B), and the acquiring corporation 
after a reorganization that otherwise satisfies the requirements of a 
forward triangular merger (as defined in Sec.  1.358-6(b)(2)(i)), a 
triangular B reorganization (as defined in Sec.  1.358-6(b)(2)(iv)), a 
triangular C reorganization (as defined in Sec.  1.358-6(b)(2)(ii)), or 
a reorganization under section 368(a)(1)(G) by reason of section 
368(a)(2)(D), provided that members of the qualified group own, in the 
aggregate, stock of the surviving, or acquiring corporation meeting the 
requirements of section 368(c). This paragraph (d)(4)(i)(B) applies to 
transactions occurring after the date this regulations are published as 
final regulations in the Federal Register.
* * * * *
    (5) Examples. (i) The following examples illustrate this paragraph 
(d). All the following corporations have only one class of stock 
outstanding.
* * * * *
    Example 7. (i) Facts. The facts are the same as in Example 6, 
except that, instead of P acquiring the assets of T, HC acquires all 
of outstanding stock of T in exchange solely for voting stock of P. 
In addition, as part of the plan of reorganization, HC transfers 10 
percent of the stock of T to each of subsidiaries S-1 through S-10. 
Finally, T will continued to operate an auto parts distributorship. 
Without regard to whether the transaction satisfies the COBE 
requirement, the transaction qualifies as a triangular B 
reorganization.
    (ii) Continuity of business enterprise. Under paragraph 
(d)(4)(i)(B) of this section, P is treated as holding all of the 
assets and conducting the business of T because S-1 through S-10, 
members of the qualified group, own stock of T meeting the 
requirements of section 368(c). Therefore, the COBE requirement of 
paragraph (d)(1) of this section is satisfied because P is treated 
as continuing T's business.
* * * * *
    Example 9. * * * (i) Facts. The facts are the same as Example 8, 
except that S-3 transfers the historic T business to PRS in exchange 
for a 1 percent interest in PRS.
* * * * *
    Example 10. * * * (i) Facts. The facts are the same as Example 
8, except that S-3 transfers the historic T business to PRS in 
exchange for a 33\1/3\ percent interest in PRS, and no member of P's 
qualified group performs active and substantial management functions 
for the ski boot business operated in PRS.
* * * * *
    Example 12. * * * (i) Facts. The facts are the same as Example 
11, except that S-1 transfers all the T assets to PRS and P and X 
each transfer cash to PRS in exchange for partnership interests. * * 
*
* * * * *
    (ii) Effective dates. Paragraph (d)(5) Example 6, and Example 8 
through Example 13 apply to transactions occurring after January 28, 
1998, except that they do not apply to any transaction occurring 
pursuant to a written agreement which is binding on January 28, 1998, 
and at all times thereafter. Paragraph (d)(5) Example 7 applies to 
transactions occurring after the date these regulations are published 
as final regulations in the Federal Register.
* * * * *

[[Page 9774]]

    3. Section 1.368-2 is amended by:
    1. Adding three sentences at the end of paragraph (f).
    2. Revising paragraph (k).
    The additions and the revision read as follows:


Sec.  1.368-2  Definition of terms.

* * * * *
    (f) * * * If a transaction otherwise qualifies as a reorganization 
under section 368(a)(1)(B) or as a reverse triangular merger (as 
defined in Sec.  1.358-6(b)(2)(iii)), the target corporation (in the 
case of a transaction that otherwise qualifies as a reorganization 
under section 368(a)(1)(B)) or the surviving corporation (in the case 
of a transaction that otherwise qualifies as a reverse triangular 
merger) remains a party to the reorganization even though its stock or 
assets are transferred in a transaction described in paragraph (k) of 
this section. If a transaction otherwise qualifies as a forward 
triangular merger (as defined in Sec.  1.358-6(b)(2)(i)), a triangular 
B reorganization (as defined in Sec.  1.358-6(b)(2)(iv)), a triangular 
C reorganization (as defined in Sec.  1.358-6(b)(2)(ii)), or a 
reorganization under section 368(a)(1)(G) by reason of section 
368(a)(2)(D), the acquiring corporation remains a party to the 
reorganization even though its stock is transferred in a transaction 
described in paragraph (k) of this section. The two preceding sentences 
apply to transactions occurring after the date these regulations are 
published as final regulations in the Federal Register.
* * * * *
    (k) Certain transfers of assets or stock in reorganizations--(1) 
General rule. A transaction otherwise qualifying as a reorganization 
under section 368(a) shall not be disqualified as a result of the 
transfer or successive transfers to one or more corporations controlled 
in each transfer by the transferor corporation in part or all of--
    (i) The assets of any party to the reorganization; or
    (ii) The stock of any party to the reorganization other than the 
issuing corporation (as defined in Sec.  1.368-1(b)).
    (2) Control. Control is defined under section 368(c).
    (3) Examples. The following examples illustrate the application of 
this paragraph (k). P is the issuing corporation and T is the target 
corporation. P has only one class of stock outstanding. The examples 
are as follows:

    Example 1. Transfers of acquired assets to controlled 
corporations after a reorganization under section 368(a)(1)(C). (i) 
Facts. T operates a bakery that supplies delectable pastries and 
cookies to local retail stores. The acquiring corporate group 
produces a variety of baked goods for nationwide distribution. P 
owns 80 percent of the stock of S-1. Pursuant to a plan of 
reorganization, T transfers all of its assets to S-1 solely in 
exchange for P stock, which T distributes to its shareholders. S-1 
owns 80 percent of the stock of S-2, and S-2 owns 80 percent of the 
stock of S-3, which also makes and supplies pastries and cookies. 
Pursuant to the plan of reorganization, S-1 transfers all of the T 
assets to S-2, and S-2 transfers all of the T assets to S-3.
    (ii) Analysis. Under this paragraph (k), the transaction, which 
otherwise qualifies as a reorganization under section 368(a)(1)(C), 
is not disqualified by reason of the fact of the successive 
transfers of all of the T assets to S-2, and from S-2 to S-3 
because, in each transfer, the transferee corporation is controlled 
by the transferor corporation.

    Example 2. Transfers of acquired assets to controlled 
corporations after a reorganization under section 368(a)(1)(D). (i) 
Facts. The facts are the same as Example 1 except that P also owns 
100 percent of the stock of T before the transaction, and T 
transfers all of its assets to S-1 solely in exchange for S-1 stock, 
which T distributes to P.
    (ii) Analysis. Under this paragraph (k), the transaction, which 
otherwise qualifies as a reorganization under section 368(a)(1)(D), 
is not disqualified by reason of the fact of the successive 
transfers of all of the acquired assets from S-1 to S-2, and from S-
2 to S-3 because, in each transfer, the transferee corporation is 
controlled by the transferor corporation.

    Example 3. Transfer of acquiring stock to controlled corporation 
after a reorganization under section 368(a)(1)(A). (i) Facts. The 
facts are the same as Example 1 except that P owns 80 percent of the 
stock of S-4 and, pursuant to the plan of reorganization, S-1 
acquires all of the T assets as a result of the merger of T with and 
into S-1. In addition, in the merger, the T shareholders receive 
consideration 50 percent of which is stock of P and 50 percent of 
which is cash. Finally, pursuant to the plan of reorganization, P 
transfers all of the S-1 stock to S-4.
    (ii) Analysis. Under this paragraph (k), the transaction, which 
otherwise qualifies as a reorganization under section 368(a)(1)(A) 
by reason of section 368(a)(2)(D), is not disqualified by the 
transfer of all of the S-1 stock to S-4 because, in the transfer, 
the transferee corporation is controlled by the transferor 
corporation.

    Example 4. Transfers of acquired stock to controlled 
corporations after a reorganization under section 368(a)(1)(B). (i) 
Facts. The facts are the same as Example 1 except that S-1 acquires 
all of the T stock rather than the T assets, and as part of the plan 
of reorganization, S-1 transfers 50 percent of the T stock to S-2, 
and S-2 transfers that T stock to S-3.
    (ii) Analysis. Under this paragraph (k), the transaction, which 
otherwise qualifies as a reorganization under section 368(a)(1)(B), 
is not disqualified by the successive transfers of part of the 
acquired stock from S-1 to S-2, and from S-3 because, in each 
transfer, the transferee corporation is controlled by the transferor 
corporation.

    Example 5. Transfers of acquiring corporation stock to 
controlled corporations after a reorganization under section 
368(a)(1)(B). (i) Facts. The facts are the same as Example 4 except 
that P owns 80 percent of the stock of S-4, and S-4 owns 80 percent 
of the stock of S-5, and, as part of the plan of reorganization, 
following the acquisition of T stock by S-1, P transfers 10 percent 
of its S-1 stock to S-4, and S-4 transfers that S-1 stock to S-5.
    (ii) Analysis. Under this paragraph (k), the transaction, which 
otherwise qualifies as a reorganization under section 368(a)(1)(B), 
is not disqualified by reason of the successive transfers of S-1 
stock to S-4, and from S-4 to S-5 because, in each transfer, the 
transferee corporation is controlled by the transferor corporation.

    Example 6. Transfer of acquired stock to a partnership. (i) 
Facts. The facts are the same as in Example 4. However, as part of 
the plan of reorganization, S-2 and S-3 form a new partnership, PRS. 
Immediately thereafter, S-3 transfers all of its T stock to PRS in 
exchange for an 80 percent partnership interest, and S-2 transfers 
cash to PRS in exchange for a 20 percent partnership interest.
    (ii) Analysis. This paragraph (k) describes the successive 
transfers of T stock to S-3, but does not describe S-3's transfer of 
T stock to PRS. Therefore, the characterization of this transaction 
must be determined under the relevant provisions of law, including 
the step transaction doctrine. See Sec.  1.368-1(a). The transaction 
fails to meet the control requirement of a reorganization described 
in section 368(a)(1)(B) because immediately after the acquisition of 
the T stock, the acquiring corporation does not have control of T.

    (4) Effective date. This paragraph (k) applies to transactions 
occurring after the date these regulations are published as final 
regulations in the Federal Register.

Mark E. Matthews,
Deputy Commissioner for Services and Enforcement.
[FR Doc. 04-4483 Filed 3-1-04; 8:45 am]
BILLING CODE 4830-01-M