[Federal Register Volume 71, Number 71 (Thursday, April 13, 2006)]
[Rules and Regulations]
[Pages 19117-19118]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 06-3527]


=======================================================================
-----------------------------------------------------------------------

DEPARTMENT OF THE TREASURY

Internal Revenue Service

26 CFR Part 1

[TD 9244]
RIN 1545-BC05; 1545-BE88


Determination of Basis of Stock or Securities Received in 
Exchange for, or With Respect to, Stock or Securities in Certain 
Transactions; Treatment of Excess Loss Accounts; Correction

AGENCY: Internal Revenue Service (IRS), Treasury.

ACTION: Correcting amendment.

-----------------------------------------------------------------------

SUMMARY: This document contains a correction to final and temporary 
regulations (TD 9244), that was published in the Federal Register on 
Thursday, January 26, 2006 (71 FR 4264). This regulation provides 
guidance regarding the determination of the basis of stock or 
securities received in exchange for, or with respect to stock or 
securities in certain transactions.

DATES: This correction is effective January 23, 2006.

FOR FURTHER INFORMATION CONTACT: Theresa M. Kolish, (202) 622-7530 (not 
a toll-free number).

SUPPLEMENTARY INFORMATION:

Background

    The final and temporary regulations (TD 9244) that are the subject 
of these corrections are under sections 356, 358 and 1502 of the 
Internal Revenue Code.

Need for Correction

    As published, TD 9244 contains errors that may prove to be 
misleading and are in need of clarification.

[[Page 19118]]

List of Subjects in 26 CFR Part 1

    Income taxes, Reporting and recordkeeping requirements.

Correction of Publication

0
Accordingly, 26 CFR part 1 is corrected by making the following 
correcting amendments:

PART 1--INCOME TAXES

0
Paragraph 1. The authority citation for part 1 continues to read in 
part as follows:


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


Sec.  1.358-1  [Corrected]

0
Par. 2. Section 1.358-1 is amended by removing the seventh and eighth 
sentences of paragraph (b), Example, and adding the following sentence 
in their place:


Sec.  1.358-1  Basis to distributes.

* * * * *
    (b) * * *

    Example * * * The basis to A of the one share of stock 
Corporation Y is $90, that is, the adjusted basis of the one share 
of stock of Corporation X ($90), decreased by the sum of the cash 
received ($10) and the fair market value of the other property 
received ($30) and increased by the sum of the amount treated as a 
dividend ($5) and the amount treated as a gain from the exchange of 
property ($35). * * *
* * * * *


Sec.  1.358-2  [Corrected]

0
Par. 3. Section 1.358-2 is amended as follows:
0
a. By revising paragraph (a)(2)(viii).
0
b. By revising paragraph (ii) in paragraph (c), Examples 4, 5, 6, and 
11.
    The corrections read as follows:


Sec.  1.358-2  Allocation of basis among nonrecognition property.

    (a) * * *
    (2) * * *
    (viii) This paragraph (a)(2) shall not apply to determine the basis 
of a share of stock or security received by a shareholder or security 
holder in an exchange described in both section 351 and section 354 or 
section 356, if, in connection with the exchange, the shareholder or 
security holder exchanges property for stock or securities in an 
exchange to which neither section 354 nor section 356 applies or 
liabilities of the shareholder or security holder are assumed.
* * * * *
    (c) * * *

    Example 4. * * *

    (ii) Analysis. Under paragraph (a)(2)(ii) of this section and under 
Sec.  1.356-1(b), because the terms of the exchange do not specify that 
shares of Corporation Y stock or cash are received in exchange for 
particular shares of Class A stock or Class B stock of Corporation X, a 
pro rata portion of the shares of Corporation Y stock and cash received 
will be treated as received in exchange for each share of Class A stock 
and Class B stock of Corporation X surrendered based on the fair market 
value of such stock. Therefore, J is treated as receiving one share of 
Corporation Y stock and $5 of cash in exchange for each share of Class 
A stock of Corporation X and one share of Corporation Y stock and $5 of 
cash in exchange for each share of Class B stock of Corporation X. J 
realizes a gain of $140 on the exchange of shares of Class A stock of 
Corporation X, $100 of which is recognized under Sec.  1.356-1(a). J 
realizes a gain of $80 on the exchanges of Class B stock of Corporation 
X, all of which is recognized under Sec.  1.356-1(a). Under paragraph 
(a)(2)(i) of this section, J has 10 shares of Corporation Y stock, each 
of which has a basis of $2 and is treated as having been acquired on 
Date 1, 10 shares of Corporation Y stock, each of which has a basis of 
$4 and is treated as having been acquired on Date 2, and 20 shares of 
Corporation Y stock, each of which has a basis of $5 and is treated as 
having been acquired on Date 3. Under paragraph (a)(2)(vii) of this 
section, on or before the date on which the basis of a share of 
Corporation Y stock received becomes relevant, J may designate which of 
the shares of Corporation Y stock received have a basis of $2, which 
have a basis of $4, and which have a basis of $5.

    Example 5. * * *

    (ii) Analysis. Under paragraph (a)(2)(ii) of this section and under 
Sec.  1.356-1(b), because the terms of the exchange specify that J 
receives 40 shares of stock of Corporation Y in exchange for J's shares 
of Class A stock of Corporation X and $200 of cash in exchange for J's 
shares of Class B stock of Corporation X and such terms are 
economically reasonable, such terms control.'' in its place. J realizes 
a gain of $140 on the exchange of shares of Class A stock of 
Corporation X, none of which is recognized under Sec.  1.356-1(a). J 
realizes a gain of $80 on the exchange of shares of Class B stock of 
Corporation X, all of which is recognized under Sec.  1.356-1(a). * * *

    Example 6. * * *

    (ii) Analysis. Under paragraph (a)(2)(ii) of this section and under 
Sec.  1.354-1(a), because the terms of the exchange specify that J 
receives 10 shares of stock of Corporation Y in exchange for J's shares 
of Class A stock of Corporation X and a Corporation Y security in 
exchange for its Corporation X security and such terms are economically 
reasonable, such terms control. * * *
* * * * *
    Example 11. * * *

    (ii) Analysis. Because the value of the common stock indicates that 
the liquidation preference associated with the Corporation Y preferred 
stock could be satisfied even if the reorganization did not occur, it 
is not appropriate to deem the issuance of additional Corporation Y 
preferred stock. * * *
* * * * *


Sec.  1.1502-19T  [Corrected]

0
3. Section 1.1502-19T is amended by:
0
a. Revising the section heading.
0
b. Revising paragraph (b)(2) through (c).
0
c. Revising the text of paragraph (h)(2)(iv).
    The corrections read as follows:


Sec.  1.1502-19T  Excess loss accounts (temporary).

    (a) through (c) [Reserved]. For further guidance, see Sec.  1.1502-
19(a) through (c).
* * * * *
    (h)(2)(iv) * * * For guidance regarding determinations of the basis 
of the stock of a subsidiary acquired in and intercompany 
reorganization on or after January 23, 2006, see paragraphs (d) and (g) 
Example 2 of this section.
* * * * *


Sec.  1.1502-32  [Corrected]

0
4. Section 1.1502-32 is amended by revising the text of paragraph 
(h)(8) to read as follows:


Sec.  1.1502-32  Investment adjustments.

* * * * *
    (h) * * *
    (8) * * * Paragraph (b)(5)(ii) Example 6 of this section applies 
only with respect to determinations of the basis of the stock a 
subsidiary on or after January 23, 2006. For determinations of the 
basis of the stock of a subsidiary before January 26, 2006, see Sec.  
1.1502-32(b)(5)(ii) Example 6 as contained in the 26 CFR part 1 edition 
revised as of April 1, 2005.

Guy R. Traynor,
Chief, Publications and Regulations Branch, Legal Processing Division, 
Associate Chief Counsel (Procedures and Administration).
[FR Doc. 06-3527 Filed 4-12-06; 8:45 am]
BILLING CODE 4830-01-P