[Federal Register Volume 69, Number 159 (Wednesday, August 18, 2004)]
[Proposed Rules]
[Pages 51209-51212]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 04-18801]


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DEPARTMENT OF THE TREASURY

Internal Revenue Service

26 CFR Part 1

[REG-130863-04]
RIN 1545-BD56


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 regarding the effect of certain transfers of assets or stock 
on the qualification of certain transactions as reorganizations under 
section 368(a). This document also contains proposed regulations that 
provide guidance on 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 must be received by November 16, 
2004.

ADDRESSES: Send submissions to: CC:PA:LPD:PR (REG-130863-04), room 
5203, Internal Revenue Service, PO Box 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-
130863-04), Courier's Desk, Internal Revenue Service, 1111 Constitution 
Avenue, NW., Washington, DC, or sent electronically, via the IRS 
Internet site at http://www.irs.gov/regs or via the Federal eRulemaking 
Portal at http://www.regulations.gov (IRS-REG-130863-04).

FOR FURTHER INFORMATION CONTACT: Concerning the regulations, Jeffrey B. 
Fienberg, (202) 622-7770; concerning submissions and the hearing, 
Lanita Van Dyke, (202) 622-3215 (not toll-free numbers).

SUPPLEMENTARY INFORMATION: 

Background and Explanation of Provisions

    On March 2, 2004, the IRS and Treasury Department published in the 
Federal Register (69 FR 9771) a notice of proposed rulemaking (REG-
165579-02) that would amend Sec.  1.368-2(k) to provide that a 
reorganization otherwise qualifying 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 (hereinafter the March 2004 proposed 
regulations). The March 2004 proposed regulations also include 
amendments to the continuity of business enterprise (COBE) regulations 
under Sec.  1.368-1(d) and the definition of a party to a 
reorganization under Sec.  1.368-2(f).
    While the March 2004 proposed regulations address transfers of 
assets and stock to corporations controlled by the transferor 
corporation, they do not address whether a transaction that otherwise 
qualifies as a reorganization continues to qualify when, pursuant to 
the plan of reorganization, assets or stock of the acquired corporation 
is distributed to a corporation or partnership following the 
reorganization. In addition, they do not provide guidance on whether a 
transaction that otherwise qualifies as a reorganization continues to 
qualify when, pursuant to the plan of reorganization, acquired assets 
are transferred to a partnership in which the transferor owns an 
interest. These proposed regulations expand the March 2004 regulations 
to address these situations.
    The IRS and Treasury Department received comments regarding the 
March 2004 proposed regulations. Comments not addressed in this 
document are still being considered.

A. Distributions

    These proposed regulations provide that a transaction otherwise 
qualifying as a reorganization under section 368(a) will not be 
disqualified as a result of a subsequent distribution of the acquired 
assets or stock if (i) no transferee receives substantially all of the 
acquired assets, substantially all of the assets of the acquired or 
surviving corporation in a transaction otherwise qualifying as a 
reorganization under section 368(a)(1)(B) or section 368(a)(1)(A) by 
reason of section 368(a)(2)(E), or stock constituting control of the 
acquired corporation, (ii) the transferee is either a member of the 
qualified group (as defined in Sec.  1.368-1(d)(4)(ii)) or a 
partnership the business of which is treated as conducted by a member 
of the qualified group under Sec.  1.368-1(d)(4)(iii), and (iii) the 
COBE requirement is satisfied. For this purpose, the term substantially 
all as used in this regulation has the same meaning as in section 
368(a)(1)(C). The IRS and Treasury Department believe that the types of 
asset and stock distributions described in these

[[Page 51210]]

proposed regulations are consistent with the policies underlying the 
reorganization provisions, which are intended to apply to transactions 
that effect readjustments of continuing interests in the reorganized 
business in modified corporate form. See Sec.  1.368-1(b); see also 
H.R. Rep. No. 83-1337, at A134 (1954) (stating that a corporation may 
not acquire assets with the intention of transferring them to a 
stranger).
    In the course of developing these proposed regulations, the IRS and 
Treasury Department considered adopting a rule that would permit a 
distribution of the acquiring, acquired, or surviving corporation's 
assets as long as the distribution did not cause that corporation to be 
treated as liquidating for Federal income tax purposes. However, the 
IRS and Treasury Department are concerned that such a rule might 
produce inappropriate results. For example, if a pre-existing acquiring 
subsidiary in a transaction otherwise qualifying under section 368(a) 
by reason of section 368(a)(2)(D) distributes all of the acquired 
assets to the issuing corporation and retains all of the previously 
held assets, the distribution may not constitute either an actual or de 
facto liquidation, even though none of the acquired assets remain in 
the acquiring corporation. It could be argued that this transaction 
should be treated as a direct acquisition of the acquired assets by the 
issuing corporation. See, e.g., Rev. Rul. 72-405 (1972-2 C.B. 217).
    The IRS and Treasury Department request comments regarding whether 
a transaction should continue to qualify as a reorganization under 
section 368(a) if the distribution, including a distribution to which 
section 355 applies, is to a person that is not a member of the 
qualified group (as defined in Sec.  1.368-1(d)(4)(ii)) or a 
partnership the business of which is not treated as conducted by a 
member of the qualified group under Sec.  1.368-1(d)(4)(iii).

B. Contributions to Partnerships

    Currently, the operative rules of Sec.  1.368-2(k) are silent on 
the effect of a post-transaction transfer of assets or stock to a 
partnership on a transaction otherwise qualifying as a reorganization. 
However, Example 3 of that regulation involves a transfer of acquired 
stock to a partnership. In the example, P owns 80 percent of the stock 
of S-1, S-1 owns 80 percent of the stock of S-2, and S-2 owns 80 
percent of the stock of S-3. Pursuant to a plan of reorganization, S-1 
acquires the stock of T solely in exchange for P voting stock, S-1 
transfers the T stock to S-2, and S-2 transfers the T stock to S-3. 
Also as part of the plan, S-2 and S-3 form PRS, a partnership, and S-3 
transfers the T stock to PRS in exchange for an 80 percent partnership 
interest. The example states that because this transfer to PRS is not 
described in Sec.  1.368-2(k), the characterization of the transaction 
must be determined under the relevant provisions of law, including the 
step transaction doctrine. The transaction therefore fails to qualify 
as a reorganization under section 368(a)(1)(B) because the acquiring 
corporation does not have control of T immediately after the 
acquisition.
    The IRS and Treasury Department are studying whether, in the 
transaction described in Example 3 of the current Sec.  1.368-2(k), S-1 
should be treated as having control of T immediately after the 
acquisition. Consequently, Example 3 is not included in these proposed 
regulations. However, the IRS and Treasury Department recognize that 
certain transfers to partnerships would cause a transaction to fail the 
COBE requirement. For example, under the facts of Example 3 of the 
current Sec.  1.368-2(k), because T is not a member of the qualified 
group after the stock transfer to PRS, the transaction would not 
satisfy the COBE requirement. Comments are requested on whether and how 
the COBE regulations should be amended to permit stock transfers to 
partnerships.

C. Effective Date

    These regulations are proposed to apply to transactions that occur 
after the date that these regulations are published as final 
regulations in the Federal Register.

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 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 businesses.

Comments and Requests for Public Hearing

    Before these proposed regulations are adopted as final regulations, 
consideration will be given to any written (a signed original and eight 
(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 Jeffrey B. 
Fienberg 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

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

[[Page 51211]]

    The revisions and additions read as follows:


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

* * * * *
    (d) * * *
    (4) * * *
    (i) Business and assets of members of a qualified group--(A) In 
general. * * *
    (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 
(a)(2)(D), provided that members of the qualified group own, in the 
aggregate, stock of the surviving, acquired, or acquiring corporation 
meeting the requirements of section 368(c). This paragraph (d)(4)(i)(B) 
applies to transactions occurring after the date these regulations are 
published as final in the Federal Register.
* * * * *
    (5) Examples. (i) The following examples illustrate this paragraph 
(d). All the corporations have only one class of stock outstanding:
* * * * *
    Example 7. (i) Facts. The facts are the same as Example 6, 
except that, instead of P acquiring the assets of T, HC acquires all 
of the 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. T will continue 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 the assets and 
conducting the business of T because S-1 through S-10, members of 
the qualified group, together own stock of T meeting the 
requirements of section 368(c). 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.
    (ii) * * *
    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 transfers 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 that 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.
* * * * *
    Par. 3. Section 1.368-2 is amended by:
    1. Adding three sentences at the end of paragraph (f).
    2. Revising paragraph (j)(3)(ii).
    3. Removing the first sentence of paragraph (j)(3)(iii) and adding 
two new sentences in its place.
    4. Revising paragraph (j)(3)(iv).
    5. 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.
* * * * *
    (j) * * *
    (3) * * *
    (ii) Except as provided in paragraph (k) of this section, the 
controlling corporation must control the surviving corporation 
immediately after the transaction.
    (iii) After the transaction, the surviving corporation must hold 
substantially all of its own properties and substantially all of the 
properties of the merged corporation (other than stock of the 
controlling corporation distributed in the transaction). The issuing 
corporation may transfer such properties as provided in paragraph (k) 
of this section. * * *
* * * * *
    (iv) Paragraph (j)(3)(ii) and the first two sentences of paragraph 
(j)(3)(iii) of this section apply to transactions occurring after the 
date these regulations are published as final regulations in the 
Federal Register. The remainder of paragraph (j)(3)(iii) of this 
section applies to transactions occurring after January 28, 1998, 
except that it does not apply to any transaction occurring pursuant to 
a written agreement which is binding on January 28, 1998, and at all 
times thereafter.
* * * * *
    (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 a 
subsequent transfer (or successive transfers) of assets or stock if--
    (i) The transfer is of part or all of--
    (A) The assets of any party to the reorganization; or
    (B) The stock of any party to the reorganization other than the 
issuing corporation (as defined in Sec.  1.368-1(b)); and
    (ii) Either--
    (A) In such subsequent transfer or transfers, a person is not the 
transferee of--
    (1) Substantially all (within the meaning of section 368(a)(1)(C)) 
of the acquired assets;
    (2) Substantially all (within the meaning of section 368(a)(1)(C)) 
of the assets of the acquired corporation immediately after a 
transaction otherwise qualifying as a reorganization under section 
368(a)(1)(B);
    (3) Substantially all (within the meaning of section 368(a)(1)(C)) 
of the

[[Page 51212]]

assets of the surviving corporation immediately after a transaction 
otherwise qualifying as a reorganization under section 368(a)(1)(A) by 
reason of section 368(a)(2)(E); or
    (4) Control of the stock of the acquired corporation; or
    (B) The transfer is to one or more corporations controlled in each 
transfer by the transferor corporation or to a partnership in which the 
transferor has an ownership interest immediately after the transfer; 
and
    (iii) The transferee is either a member of the qualified group (as 
defined in Sec.  1.368-1(d)(4)(ii)) or a partnership the business of 
which is treated as conducted by a member of the qualified group under 
Sec.  1.368-1(d)(4)(iii); and
    (iv) The requirements of Sec.  1.368-1(d) are satisfied.
    (2) Control is defined under section 368(c).
    (3) Examples. The following examples illustrate the application of 
this paragraph (k). Except as otherwise noted, P is the issuing 
corporation, and T is the target corporation. 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 and 80 
percent of the stock of S-4. S-1 owns 80 percent of the stock of S-2. 
S-2 owns 80 percent of the stock of S-3, which also makes and supplies 
pastries and cookies. S-4 owns 80 percent of the stock of S-5. The 
examples are as follows:

    Example 1. Contributions of acquired assets to controlled 
corporations after a reorganization under section 368(a)(1)(C). (i) 
Facts. 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. In addition, 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 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, 
S-2 and S-3 are members of the qualified group, and the transaction 
satisfies the requirements of Sec.  1.368-1(d).
    Example 2. Distribution of acquired assets to the issuing 
corporation after a reorganization under section 368(a)(1)(C). (i) 
Facts. 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. In addition, pursuant to the plan of 
reorganization, S-1 transfers less than substantially all of the T 
assets to P. T does not have any liabilities.
    (ii) Analysis. Under this paragraph (k), the transaction, which 
otherwise qualifies as a reorganization under section 368(a)(1)(C), 
is not disqualified by the transfer of T assets from S-1 to P 
because P is transferred less than substantially all of the T 
assets, P is a member of the qualified group, and the transaction 
satisfies the requirements of Sec.  1.368-1(d).
    Example 3. Contributions of acquired assets to controlled 
corporations after a reorganization under section 368(a)(1)(D). (i) 
Facts. P owns 100 percent of the stock of T. Pursuant to a plan of 
reorganization, T transfers all of its assets to S-1 solely in 
exchange for S-1 stock, which T distributes to P. In addition, 
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)(D), 
is not disqualified by the successive transfers of all 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, S-2 and S-3 are members of the qualified group, and the 
transaction satisfies the requirements of Sec.  1.368-1(d).
    Example 4. Contribution of acquiring stock to controlled 
corporation after a reorganization under section 368(a)(1)(A). (i) 
Facts. Pursuant to a plan of reorganization, S-1 acquires all of the 
T assets in the merger of T into S-1. In the merger, the T 
shareholders receive consideration 50 percent of which is P stock 
and 50 percent of which is cash. Also, 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 the transferee 
corporation is controlled by the transferor corporation, S-4 is a 
member of the qualified group, and the transaction satisfies the 
requirements of Sec.  1.368-1(d).
    Example 5. Contribution of acquired assets to a partnership 
after a reorganization under section 368(a)(1)(A). (i) Facts. 
Pursuant to a plan of reorganization, S-1 acquires all of the T 
assets in the merger of T into S-1. In the merger, the T 
shareholders receive consideration 50 percent of which is P stock 
and 50 percent of which is cash. In addition, pursuant to the plan 
of reorganization, S-1 transfers all of the T assets to PRS, a 
partnership in which S-1 owns a 33\1/3\ percent interest. S-1 does 
not perform active and substantial management functions as a partner 
with respect to PRS' business.
    (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 T assets from S-1 to PRS because S-1 has an ownership 
interest in PRS immediately after the transfer, S-1 is a member of 
the qualified group and is treated as conducting the business of PRS 
under Sec.  1.368-1(d)(4)(iii), and the transaction satisfies the 
requirements of Sec.  1.368-1(d).
    Example 6. Distribution of acquired assets to a partnership 
after a reorganization under section 368(a)(1)(A). (i) Facts. P owns 
an 80 percent interest in PRS, a partnership. PRS owns 20 percent of 
the stock of S-1. Pursuant to a plan of reorganization, S-1 acquires 
all of the T assets in the merger of T into S-1. In the merger, the 
T shareholders receive consideration 50 percent of which is P stock 
and 50 percent of which is cash. In addition, pursuant to the plan 
of reorganization, S-1 distributes less than substantially all of 
the T assets to PRS in redemption of 5 percent of the stock of S-1 
owned by PRS.
    (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 T assets from S-1 to PRS because PRS receives less than 
substantially all of the T assets, P is a member of the qualified 
group and is treated as conducting the business of PRS under Sec.  
1.368-1(d)(4)(iii), and the transaction satisfies the requirements 
of Sec.  1.368-1(d).
    Example 7. Contributions of acquired stock to controlled 
corporations after a reorganization under section 368(a)(1)(B). (i) 
Facts. Pursuant to a plan of reorganization, the T shareholders 
transfer all of their T stock to S-1 solely in exchange for P stock. 
In addition, pursuant to 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-2 to S-3 because, in each 
transfer, the transferee corporation is controlled by the transferor 
corporation, S-2 and S-3 are members of the qualified group, and the 
transaction satisfies the requirements of Sec.  1.368-1(d).
    Example 8. Contributions of acquiring corporation stock to 
controlled corporations after a reorganization under section 
368(a)(1)(B). (i) Facts. Pursuant to a plan of reorganization, the T 
shareholders transfer all of their T stock to S-1 solely in exchange 
for P stock. In addition, as part of the plan of reorganization, 
following the acquisition of T stock by S-1, P transfers 10 percent 
of the 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 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, S-4 and S-5 
are members of the qualified group, and the transaction satisfies 
the requirements of Sec.  1.368-1(d).

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

Deborah M. Nolan,
Acting Deputy Commissioner for Services and Enforcement.
[FR Doc. 04-18801 Filed 8-17-04; 8:45 am]
BILLING CODE 4830-01-P