[Federal Register Volume 73, Number 91 (Friday, May 9, 2008)]
[Rules and Regulations]
[Pages 26322-26325]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: E8-10451]


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DEPARTMENT OF THE TREASURY

Internal Revenue Service

26 CFR Part 1

[TD 9396]
RIN 1545-BH52


Corporate Reorganizations; Amendment to Transfers of Assets or 
Stock Following a Reorganization

AGENCY: Internal Revenue Service (IRS), Treasury.

ACTION: Final regulation.

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SUMMARY: This document contains final regulations that amend TD 9361, 
titled Transfers of Assets or Stock Following a Reorganization. These 
final regulations make certain clarifying amendments to the rules 
regarding the effect of certain transfers of assets or stock on the 
continuing qualification of transactions as reorganizations under 
section 368(a). These regulations affect corporations and their 
shareholders.

DATES: Effective Date: These regulations are effective on May 9, 2008.
    Applicability Date: For dates of applicability, see Sec.  1.368-
2(k)(3).

FOR FURTHER INFORMATION CONTACT: Mary W. Lyons, at (202) 622-7930 (not 
a toll-free number).

SUPPLEMENTARY INFORMATION:

Background

    As noted in the preamble to TD 9361 (72 FR 60556), Sec.  1.368-1(a) 
provides that a transaction must be evaluated under all relevant 
provisions of law, including the step transaction doctrine, in 
determining whether it qualifies as a reorganization under section 
368(a). Section 1.368-2 provides guidance regarding whether a 
transaction satisfies the explicit statutory requirements of a 
particular reorganization. Specifically, section 1.368-2(k) provides 
that a transaction otherwise qualifying as a reorganization will not be 
disqualified or recharacterized as a result of certain subsequent 
transfers of assets or stock described therein. The fact that a 
subsequent transfer of assets or stock is not described in Sec.  1.368-
2(k) does not necessarily preclude reorganization qualification, but 
the overall transaction would then be subject to analysis under the 
step transaction doctrine.
    Section 1.368-2(k), as in effect prior to these final regulations, 
generally permits one or more post-reorganization transfers (or 
successive transfers) of assets or stock, provided that the Continuity 
of Business Enterprise (COBE) requirement is satisfied and the 
transfer(s) qualify as ``distributions'' (as described in Sec.  1.368-
2(k)(1)(i)) or ``other transfers'' (as described in Sec.  1.368-
2(k)(1)(ii)). These final regulations amend those rules to clarify that 
a transfer to the former shareholders of the acquired corporation 
(other than a former shareholder that is also the acquiring 
corporation) or the surviving corporation, as the case may be, is not 
described in paragraph (k)(1) to the extent it constitutes the receipt 
by such shareholders of consideration for their proprietary interests 
in the acquired corporation or the surviving corporation, as the case 
may be. Any such transfer to the former shareholders following a 
transaction otherwise qualifying as a reorganization under section 
368(a) calls into question whether the underlying transaction satisfies 
the continuity of interest requirement in Treas. Reg. Sec.  1.368-1(e) 
as well as certain statutory limitations on permissible consideration 
(such as the ``solely for voting stock'' requirement in section 
368(a)(1)(B) or (C)). Therefore, such transfers are outside the scope 
of the safe harbor protection afforded by these final regulations. 
Nevertheless, the safe harbor of Treas. Reg. Sec.  1.368-2(k) continues 
to apply to transfers to the former shareholders that do not constitute 
consideration for their proprietary interests in the acquired 
corporation or the surviving corporation, as the case may be, such as 
certain pro-rata dividend distributions by the acquiring corporation 
following a reorganization. Moreover, the amendment provides that the 
limitation on the scope of Treas. Reg. 1.368-2(k) does not apply to 
transfers to a shareholder that also is the acquiring corporation in 
the reorganization. Thus, the regulations continue to provide safe 
harbor protection to certain ``upstream'' reorganizations followed by a 
transfer of acquired assets. See, for example, Rev. Rul. 69-617, 1969-2 
CB 57.
    In addition, these final regulations amend Sec.  1.368-2(k) to 
clarify that the safe harbor shall not apply to a transfer by the 
former shareholders of the acquired corporation (other than a

[[Page 26323]]

former shareholder that is also the acquiring corporation) or the 
surviving corporation, as the case may be, of consideration initially 
received in the potential reorganization to the issuing corporation or 
a person related to the issuing corporation (see definition of 
``related person'' in Sec.  1.368-1(e)).
    Further, these final regulations revise the title of paragraph 
(k)(1)(ii) and the requirement in paragraph (k)(1)(ii)(A). These 
amendments are intended to clarify that a distribution to shareholders 
is not a transfer described in paragraph (k)(1)(ii) regardless of 
whether or not it is described in paragraph (k)(1)(i). Additionally, 
these final regulations amend paragraph (k)(1)(ii)(C) to clarify that a 
transfer is not described in paragraph (k)(1)(ii) if the acquired 
corporation, the acquiring corporation, or the surviving corporation, 
as the case may be, terminates its corporate existence for Federal 
income tax purposes in connection with the transfer.
    Finally, conforming changes are made to the analysis in Examples 1, 
6, 7, 8 and 9, and one clarifying change is made to the facts in 
Example 3.

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 have been submitted to the Chief Counsel for Advocacy of 
the Small Business Administration for comment on their impact on small 
businesses.

Drafting Information

    The principal author of these final regulations is Mary W. Lyons of 
the Office of Associate Chief Counsel (Corporate). However, other 
personnel from the IRS and Treasury Department participated in their 
development.

Availability of IRS Documents

    IRS revenue rulings, procedures, and notices cited in this preamble 
are made available by the Superintendent of Documents, U.S. Government 
Printing Office, Washington, DC 20402.

List of Subjects in 26 CFR Part 1

    Income taxes, Reporting and recordkeeping requirements.

Adoption of Amendments to the Regulations

0
Accordingly, 26 CFR part 1 is amended as follows:

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 * * *


0
Par. 2. Section 1.368-2(k) is revised to read as follows:


Sec.  1.368-2  Definition of terms.

* * * * *
    (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 or recharacterized as a 
result of one or more subsequent transfers (or successive transfers) of 
assets or stock, provided that the requirements of Sec.  1.368-1(d) are 
satisfied and the transfer(s) are described in either paragraph 
(k)(1)(i) or (k)(1)(ii) of this section. However, this paragraph (k) 
shall not apply to a transfer to the former shareholders of the 
acquired corporation (other than a former shareholder that is also the 
acquiring corporation) or the surviving corporation, as the case may 
be, to the extent it constitutes the receipt of consideration for a 
proprietary interest in the acquired corporation or the surviving 
corporation, as the case may be. Similarly, this paragraph (k) shall 
not apply to a transfer by the former shareholders of the acquired 
corporation (other than a former shareholder that is also the acquiring 
corporation) or the surviving corporation, as the case may be, of 
consideration initially received in the potential reorganization to the 
issuing corporation or a person related to the issuing corporation (see 
definition of ``related person'' in Sec.  1.368-1(e)).
    (i) Distributions. One or more distributions to shareholders 
(including distribution(s) that involve the assumption of liabilities) 
are described in this paragraph (k)(1)(i) if--
    (A) The property distributed consists of--
    (1) Assets of the acquired corporation, the acquiring corporation, 
or the surviving corporation, as the case may be, or an interest in an 
entity received in exchange for such assets in a transfer described in 
paragraph (k)(1)(ii) of this section;
    (2) Stock of the acquired corporation provided that such 
distribution(s) of stock do not cause the acquired corporation to cease 
to be a member of the qualified group (as defined in Sec.  1.368-
1(d)(4)(ii)); or
    (3) A combination thereof; and
    (B) The aggregate of such distributions does not consist of--
    (1) An amount of assets of the acquired corporation, the acquiring 
corporation (disregarding assets held prior to the potential 
reorganization), or the surviving corporation (disregarding assets of 
the merged corporation), as the case may be, that would result in a 
liquidation of such corporation for Federal income tax purposes; or
    (2) All of the stock of the acquired corporation that was acquired 
in the transaction.
    (ii) Transfers Other Than Distributions. One or more other 
transfers are described in this paragraph (k)(1)(ii) if--
    (A) The transfer(s) do not consist of one or more distributions to 
shareholders;
    (B) The property transferred consists of--
    (1) Part or all of the assets of the acquired corporation, the 
acquiring corporation, or the surviving corporation, as the case may 
be;
    (2) Part or all of the stock of the acquired corporation, the 
acquiring corporation, or the surviving corporation, as the case may 
be, provided that such transfer(s) of stock do not cause such 
corporation to cease to be a member of the qualified group (as defined 
in Sec.  1.368-1(d)(4)(ii)); or
    (3) A combination thereof; and
    (C) The acquired corporation, the acquiring corporation, or the 
surviving corporation, as the case may be, does not terminate its 
corporate existence for Federal income tax purposes in connection with 
the transfer(s).
    (2) Examples. The following examples illustrate the application of 
this paragraph (k). Except as otherwise noted, P is the issuing 
corporation, and T is an unrelated target corporation. All corporations 
have only one class of stock outstanding. 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. Except as otherwise noted, P owns all 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 and 50 percent of the stock of S-5, S-2 owns 80 
percent of the stock of S-3, and S-4 owns the remaining 50 percent of 
the stock of S-5. The examples are as follows:

[[Page 26324]]

    Example 1. Transfers of acquired assets to members of the 
qualified group 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, and S-1's assumption of T's 
liabilities. In addition, pursuant to the plan, 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 the transfers are not one 
or more distributions to shareholders, the transfers consist of part 
or all of the assets of the acquiring corporation, the acquiring 
corporation does not terminate its corporate existence for Federal 
income tax purposes in connection with the transfers, and the 
transaction satisfies the requirements of Sec.  1.368-1(d).
    Example 2. Distribution of acquired assets to a member of the 
qualified group 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, and S-1's assumption of T's 
liabilities. In addition, pursuant to the plan, S-1 distributes half 
of the T assets to P, and P assumes half of the T 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 distribution of half of the T assets from 
S-1 to P, or P's assumption of half of the T liabilities from S-1, 
because the distribution consists of assets of the acquiring 
corporation, the distribution does not consist of an amount of S-1's 
assets that would result in a liquidation of S-1 for Federal income 
tax purposes (disregarding S-1's assets held prior to the 
acquisition of T), and the transaction satisfies the requirements of 
Sec.  1.368-1(d).
    Example 3. Indirect distribution of acquired assets to a member 
of the qualified group after a reorganization under section 
368(a)(1)(C). (i) Facts. The facts are the same as Example 2, except 
that, instead of S-1 distributing half of the T assets to P and 
having P assume half of the T liabilities, S-1 contributes half of 
the T assets to newly formed S-6, S-6 assumes half of the T 
liabilities, and S-1 distributes all of the S-6 stock to P.
    (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 half of the T assets to S-6 
and the distribution of the S-6 stock to P because the transfer of 
half of the T assets to S-6 is described in paragraph (k)(1)(ii) of 
this section, the distribution of the S-6 stock to P is an indirect 
distribution of assets of the acquiring corporation, the 
distribution does not consist of an amount of S-1's assets that 
would result in a liquidation of S-1 for Federal income tax purposes 
(disregarding S-1's assets held prior to the acquisition of T), and 
the transaction satisfies the requirements of Sec.  1.368-1(d).
    Example 4. Distribution of acquired stock to a controlled 
partnership after a reorganization under section 368(a)(1)(B). (i) 
Facts. P owns 80 percent of the stock of S-1, and an 80-percent 
interest in PRS, a partnership. S-4 owns the remaining 20-percent 
interest in PRS. PRS owns the remaining 20 percent of the stock of 
S-1. 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, S-1 distributes 90 percent of the 
T stock 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)(B), 
is not disqualified by the distribution of 90 percent of the T stock 
from S-1 to PRS because the distribution consists of less than all 
of the stock of the acquired corporation that was acquired in the 
transaction, the distribution does not cause T to cease to be a 
member of the qualified group (as defined in Sec.  1.368-
1(d)(4)(ii)), and the transaction satisfies the requirements of 
Sec.  1.368-1(d).
    Example 5. Transfer of acquired stock to a non-controlled 
partnership. (i) Facts. Pursuant to a plan, 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, T distributes half of its assets 
to S-1, S-1 assumes half of the T liabilities, and S-1 transfers the 
T stock to S-2. S-2 and U, an unrelated corporation, form a new 
partnership, PRS. Immediately thereafter, S-2 transfers all of the T 
stock to PRS in exchange for a 50 percent interest in PRS, and U 
transfers cash to PRS in exchange for a 50 percent interest in PRS.
    (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 distribution of half of the T assets from 
T to S-1, or S-1's assumption of half of the T liabilities from T, 
because the distribution consists of assets of the acquired 
corporation, the distribution does not consist of an amount of T's 
assets that would result in a liquidation of T for Federal income 
tax purposes, and the transaction satisfies the requirements of 
Sec.  1.368-1(d). Further, this paragraph (k) describes the transfer 
of the acquired stock from S-1 to S-2, but does not describe the 
transfer of the acquired stock from S-2 to PRS because such transfer 
causes T to cease to be a member of the qualified group (as defined 
in Sec.  1.368-1(d)(4)(ii)). 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.
    Example 6. Transfers of acquired assets to members of the 
qualified group after a reorganization under section 368(a)(1)(D). 
(i) Facts. P owns all 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, and S-1's 
assumption of T's liabilities. In addition, pursuant to the plan, 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 T assets 
from S-1 to S-2 and from S-2 to S-3 because the transfers are not 
one or more distributions to shareholders, the transfers consist of 
part or all of the assets of the acquiring corporation, the 
acquiring corporation does not terminate its corporate existence for 
Federal income tax purposes in connection with the transfers, and 
the transaction satisfies the requirements of Sec.  1.368-1(d).
    Example 7. Transfer of stock of the acquiring corporation to a 
member of the qualified group after a reorganization under section 
368(a)(1)(A) by reason of section 368(a)(2)(D). (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 
solely P stock. Also, pursuant to the plan, 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 transfer is not 
a distribution to shareholders, the transfer consists of part or all 
of the stock of the acquiring corporation, the transfer does not 
cause S-1 to cease to be a member of the qualified group (as defined 
in Sec.  1.368-1(d)(4)(ii)), the acquiring corporation does not 
terminate its corporate existence for Federal income tax purposes in 
connection with the transfer, and the transaction satisfies the 
requirements of Sec.  1.368-1(d).
    Example 8. Transfer of acquired assets to a partnership after a 
reorganization under section 368(a)(1)(A) by reason of section 
368(a)(2)(D). (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 solely P stock. In addition, 
pursuant to the plan, S-1 transfers all of the T assets to PRS, a 
partnership in which S-1 owns a 33\1/3\-percent interest. PRS 
continues T's historic business. 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 the transfer is not a 
distribution to shareholders, the transfer consists of part or all 
of the assets of the acquiring corporation, the acquiring 
corporation does not terminate its corporate existence for Federal 
income tax purposes in connection with the transfers, and the 
transaction satisfies the requirements of Sec.  1.368-1(d).
    Example 9. Sale of acquired assets to a member of the qualified 
group 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 in exchange for P stock, which T distributes to its

[[Page 26325]]

shareholders, and S-1's assumption of T's liabilities. In addition, 
pursuant to the plan, S-1 sells all of the T assets to S-5 for cash 
equal to the fair market value of those assets.
    (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 sale of all of the T assets from S-1 to 
S-5 because the transfer is not a distribution to shareholders, the 
transfer consists of part or all of the assets of the acquiring 
corporation, the acquiring corporation does not terminate its 
corporate existence for Federal income tax purposes in connection 
with the transfer, and the transaction satisfies the requirements of 
Sec.  1.368-1(d).
    (3) Effective/applicability dates. This paragraph (k) applies to 
transactions occurring on or after May 9, 2008, except that it does not 
apply to any transaction occurring pursuant to a written agreement 
which is binding before May 9, 2008, and at all times after that.
* * * * *

Linda E. Stiff,
Deputy Commissioner for Services and Enforcement.
    Approved: May 2, 2008.
 Eric Solomon,
Assistant Secretary of the Treasury (Tax Policy).
[FR Doc. E8-10451 Filed 5-8-08; 8:45 am]
BILLING CODE 4830-01-P