[Federal Register Volume 76, Number 203 (Thursday, October 20, 2011)]
[Rules and Regulations]
[Pages 65110-65112]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2011-27240]


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DEPARTMENT OF THE TREASURY

Internal Revenue Service

26 CFR Part 1

[TD 9548]
RIN 1545-BH49


Guidance Regarding the Treatment of Stock of a Controlled 
Corporation Under Section 355(a)(3)(B)

AGENCY: Internal Revenue Service (IRS), Treasury.

ACTION: Final regulations and removal of temporary regulations.

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SUMMARY: This document contains final regulations regarding the 
distribution of stock of a controlled corporation acquired in a 
transaction described in section 355(a)(3)(B) of the Internal Revenue 
Code (Code). This action is necessary in light of amendments to section 
355(b). These final regulations will affect corporations and their 
shareholders.

DATES: Effective Date: These final regulations are effective on October 
20, 2011.
    Applicability Date: For dates of applicability, see Sec.  1.355-
2(i).

FOR FURTHER INFORMATION CONTACT: Russell P. Subin, (202) 622-7790 (not 
a toll-free number).

SUPPLEMENTARY INFORMATION:

Background

    This document contains amendments to 26 CFR part 1 regarding 
section 355(a)(3)(B).
    Section 355(a) provides that, under certain circumstances, a 
corporation may distribute stock and securities in a corporation it 
controls to its shareholders and security holders without causing 
either the distributing corporation (distributing) or its shareholders 
and security holders to recognize income, gain, or loss.
    Sections 355(a)(1)(C) and 355(b)(1) generally require that 
distributing and the controlled corporation (controlled) each be 
engaged, immediately after the distribution, in the active conduct of a 
trade or business. Section 355(b)(2)(A) provides that a corporation 
shall be treated as engaged in the active conduct of a trade or 
business if and only if it is engaged in the active conduct of a trade 
or business.
    Section 355(b)(2)(B) requires that the trade or business have been 
actively conducted throughout the five-year period ending on the date 
of the distribution (pre-distribution period). Section 355(b)(2)(C) 
provides that the trade or business must not have been acquired in a 
transaction in which gain or loss was recognized in whole or in part 
(taxable transaction) within the pre-distribution period. Section 
355(b)(2)(D) provides that control of a corporation that (at the time 
of acquisition of control) was conducting the trade or business must 
not have been directly or indirectly acquired by any distributee 
corporation or by distributing during the pre-distribution period in a 
taxable transaction.
    Section 355(b)(3)(A) provides that for purposes of determining 
whether a corporation meets the requirements of section 355(b)(2)(A), 
all members of such corporation's separate affiliated group (SAG) shall 
be treated as one corporation. Section 355(b)(3)(B) provides that for 
purposes of section 355(b)(3), the term SAG means, with respect to any 
corporation, the affiliated group that would be determined under 
section 1504(a) if such corporation were the common parent and section 
1504(b) did not apply. Section 355(b)(3)(C) provides that if a 
corporation became a SAG member as a result of one or more taxable 
transactions, any trade or business conducted by such corporation (at 
the time that such corporation became such a member) shall be treated 
for purposes of section 355(b)(2) as acquired in a taxable transaction.
    Section 355(a)(3)(B) provides that for purposes of section 355 
(other than section 355(a)(1)(D)) and so much of section 356 as relates 
to section 355, stock of controlled acquired by distributing by reason 
of any transaction (i) which occurs within five years of the 
distribution of such stock, and (ii) which is a taxable transaction, 
shall not be treated as stock of controlled, but as other property.
    Section 355(b)(3)(D) provides that the Secretary shall prescribe 
such regulations as are necessary or appropriate to carry out the 
purposes of section 355(b)(3), including regulations that provide for 
the proper application of section 355(b)(2)(B), (C), and (D), and 
modify the application of section 355(a)(3)(B), in connection with the 
application of section 355(b)(3).
    Pursuant to section 355(b)(3)(D) and section 7805, temporary 
regulations (TD 9435) under section 355(a)(3)(B) were published in the 
Federal Register (73 FR 75946) on December 15, 2008. A notice of 
proposed rulemaking (REG-150670-07) cross-referencing the temporary 
regulation was published in the Federal Register on the same day (73 FR 
75979). The temporary regulations were intended to harmonize the 
application of section 355(a)(3)(B) with section 355(b). Generally, the 
temporary regulations: (1) Disregarded transfers of controlled stock 
between members of the distributing corporation's SAG (DSAG), (2) did 
not treat controlled stock as other property if controlled became a 
DSAG member, and (3) retained the exception of prior regulation Sec.  
1.355-2(g) as contained in 26 CFR part 1, revised as of April 1, 2008, 
for acquisitions from affiliates described in Sec.  1.355-3(b)(4)(iii).
    The preamble to the temporary regulations requested comments 
regarding a variety of issues under section 355(a)(3)(B). One written 
comment responding to the request was received. No public hearing was 
requested or held.

Summary of Comment and Guidance

    The comment generally agreed with the text of the temporary 
regulations. In addition, the comment addressed, among other things, 
the treatment of cash paid to acquire controlled stock in lieu of 
fractional shares, indirect acquisitions and acquisitions of controlled 
stock by a predecessor to a member of the DSAG, issuances of controlled 
stock, and redemptions of controlled stock. After considering the 
comment, the IRS and Treasury Department have decided not to expand the 
scope of the final regulation to cover additional situations at this 
time. These final regulations adopt the substantive rules of the 
temporary regulations without change.
    The IRS and Treasury Department continue to study the 
interrelationship between section 355(a)(3)(B) and section 355(b). No 
inference regarding the content of future section 355(b) guidance 
should be drawn from these final regulations. In addition, further 
guidance may be issued under section 355(a)(3)(B) in connection with 
future section 355(b) guidance if it is necessary to harmonize the two 
provisions.

Special Analyses

    It has been determined that this Treasury Decision is not a 
significant regulatory action as defined in

[[Page 65111]]

Executive Order 12866, as supplemented by Executive Order 13563. 
Therefore, a regulatory assessment is not required. It is hereby 
certified that these final regulations will not have a significant 
economic impact on a substantial number of small entities. This 
certification is based on the fact that section 355(a)(3)(B) generally 
applies to parent-subsidiary groups of corporations, which tend to be 
larger businesses, and that these regulations primarily grant relief 
from the application of section 355(a)(3)(B) in certain situations. 
Therefore, a Regulatory Flexibility Analysis under the Regulatory 
Flexibility Act (5 U.S.C. chapter 6) is not required. Pursuant to 
section 7805(f) of the Code, the proposed regulations were submitted to 
the Chief Counsel for Advocacy of the Small Business Administration for 
comment on their impact on small business.

Drafting Information

    The principal author of these regulations is Russell P. Subin 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.

Adoption of Amendments to the Regulations

    Accordingly, 26 CFR part 1 is amended as follows:

PART 1--INCOME TAXES

0
Paragraph 1. The authority citation for part 1 is amended by adding an 
entry in numerical order to read in part as follows:


    Authority: 26 U.S.C. 7805. * * *
    Section 1.355-2(g) and (i) also issued under 26 U.S.C. 
355(b)(3)(D). * * *


0
Par. 2. Section 1.355-0 is amended by revising the entries under Sec.  
1.355-2(g) and (i) to read as follows:

Sec.  1.355-0 Outline of sections.
* * * * *
Sec.  1.355-2 Limitations.
* * * * *
    (g) Recently acquired controlled stock under section 355(a)(3)(B).
    (1) Other property.
    (2) Exceptions.
    (3) DSAG.
    (4) Taxable transaction.
    (5) Examples.
* * * * *
    (i) Effective/applicability date.


0
Par. 3. Section 1.355-1 is amended by revising paragraph (a) to read as 
follows:


Sec.  1.355-1  Distribution of stock and securities of a controlled 
corporation.

    (a) Effective/applicability date of certain sections. Except as 
otherwise provided, this section and Sec. Sec.  1.355-2 through 1.355-4 
apply to transactions occurring after February 6, 1989. For 
transactions occurring on or before that date, see 26 CFR 1.355-1 
through 1.355-4 (revised as of April 1, 1987). This section and 
Sec. Sec.  1.355-2 through 1.355-4, other than Sec.  1.355-2(g) and 
(i), do not reflect the amendments to section 355 made by the Revenue 
Act of 1987, the Technical and Miscellaneous Revenue Act of 1988, and 
the Tax Technical Corrections Act of 2007. For the applicability date 
of Sec. Sec.  1.355-2(g), 1.355-5, 1.355-6, and 1.355-7, see Sec. Sec.  
1.355-2(i), 1.355-5(e), 1.355-6(g), and 1.355-7(k), respectively.
* * * * *

0
Par. 4. Section 1.355-2 is amended by revising paragraphs (g) and (i) 
to read as follows:


Sec.  1.355-2  Limitations.

* * * * *
    (g) Recently acquired controlled stock under section 355(a)(3)(B)--
(1) Other property. Except as provided in paragraph (g)(2) of this 
section, for purposes of section 355(a)(1)(A), section 355(c), and so 
much of section 356 as relates to section 355, stock of a controlled 
corporation acquired by the DSAG in a taxable transaction (as defined 
in paragraph (g)(4) of this section) within the five-year period ending 
on the date of the distribution (pre-distribution period) shall not be 
treated as stock of the controlled corporation but shall be treated as 
``other property.'' Transfers of controlled corporation stock that is 
owned by the DSAG immediately before and immediately after the transfer 
are disregarded and are not acquisitions for purposes of this paragraph 
(g)(1).
    (2) Exceptions. Paragraph (g)(1) of this section does not apply to 
an acquisition of stock of the controlled corporation--
    (i) If the controlled corporation is a DSAG member at any time 
after the acquisition (but prior to the distribution); or
    (ii) Described in Sec.  1.355-3(b)(4)(iii).
    (3) DSAG. For purposes of this paragraph (g), a DSAG is the 
distributing corporation's separate affiliated group (the affiliated 
group which would be determined under section 1504(a) if such 
corporation were the common parent and section 1504(b) did not apply) 
that consists of the distributing corporation as the common parent and 
all corporations affiliated with the distributing corporation through 
stock ownership described in section 1504(a)(1)(B) (regardless of 
whether the corporations are includible corporations under section 
1504(b)). For purposes of paragraph (g)(1) of this section, any 
reference to the DSAG is a reference to the distributing corporation if 
it is not the common parent of a separate affiliated group.
    (4) Taxable transaction--(i) Generally. For purposes of this 
paragraph (g), a taxable transaction is a transaction in which gain or 
loss was recognized in whole or in part.
    (ii) Dunn Trust and predecessor issues. [Reserved].
    (5) Examples. The following examples illustrate this paragraph (g). 
Assume that C, D, P, and S are corporations, X is an unrelated 
individual, each of the transactions is unrelated to any other 
transaction and, but for the issue of whether C stock is treated as 
``other property'' under section 355(a)(3)(B), the distributions 
satisfy all of the requirements of section 355. No inference should be 
drawn from any of these examples as to whether any requirements of 
section 355 other than section 355(a)(3)(B), as specified, are 
satisfied. Furthermore, the following definitions apply:
    (i) Purchase is an acquisition that is a taxable transaction.
    (ii) Section 368(c) stock is stock constituting control within the 
meaning of section 368(c).
    (iii) Section 1504(a)(2) stock is stock meeting the requirements of 
section 1504(a)(2).

    Example 1.  Hot stock. For more than five years, D has owned 
section 368(c) stock but not section 1504(a)(2) stock of C. In year 
6, D purchases additional C stock from X. However, D does not own 
section 1504(a)(2) stock of C after the year 6 purchase. If D 
distributes all of its C stock within five years after the year 6 
purchase, for purposes of section 355(a)(1)(A), section 355(c), and 
so much of section 356 as relates to section 355, the C stock 
purchased in year 6 would be treated as ``other property.'' See 
paragraph (g)(1) of this section.
    Example 2. C becomes a DSAG member. For more than five years, D 
has owned section 368(c) stock but not section 1504(a)(2) stock of 
C. In year 6, D purchases additional C stock from X such that D's 
total ownership of C is section 1504(a)(2) stock. If D distributes 
all of its C stock within five years after the year 6 purchase, the 
distribution of the C stock purchased in year 6 would not be treated 
as ``other property'' because C becomes a DSAG member. See paragraph 
(g)(2)(i) of this section. The result would be the same if D did not 
own any C stock prior to year 6 and D purchased all of the C stock 
in year 6. See paragraph (g)(2)(i) of this section. Similarly, if D 
did not own

[[Page 65112]]

any C stock prior to year 6, D purchased 20 percent of the C stock 
in year 6, and then acquired all of the remaining C stock in year 7, 
the C stock purchased in year 6 and the C stock acquired in year 7 
(even if purchased) would not be treated as ``other property'' 
because C becomes a DSAG member. See paragraph (g)(2)(i) of this 
section.
    Example 3. Intra-SAG transaction. For more than five years, D 
has owned all of the stock of S. D and S, in the aggregate, have 
owned section 368(c) stock but not section 1504(a)(2) stock of C. 
Therefore, D and S are DSAG members, but C is not. In year 6, D 
purchases S's C stock. If D distributes all of its C stock within 
five years after the year 6 purchase, the distribution of the C 
stock purchased in year 6 would not be treated as ``other 
property.'' D's purchase of the C stock from S is disregarded for 
purposes of paragraph (g)(1) of this section because that C stock 
was owned by the DSAG immediately before and immediately after the 
purchase. See paragraph (g)(1) of this section.
    Example 4. Affiliate exception. For more than five years, P has 
owned 90 percent of the sole outstanding class of the stock of D and 
a portion of the stock of C, and X has owned the remaining 10 
percent of the D stock. Throughout this period, D has owned section 
368(c) stock but not section 1504(a)(2) stock of C. In year 6, D 
purchases P's C stock. However, D does not own section 1504(a)(2) 
stock of C after the year 6 purchase. If D distributes all of its C 
stock to X in exchange for X's D stock within five years after the 
year 6 purchase, the distribution of the C stock purchased in year 6 
would not be treated as ``other property'' because the C stock was 
purchased from a member (P) of the affiliated group (as defined in 
Sec.  1.355-3(b)(4)(iv)) of which D is a member, and P did not 
purchase that C stock within the pre-distribution period. See 
paragraph (g)(2)(ii) of this section.
* * * * *
    (i) Effective/applicability date. Paragraphs (g)(1) through (g)(5) 
of this section apply to distributions occurring after October 20, 
2011. For rules regarding distributions occurring on or before October 
20, 2011, see Sec.  1.355-2T(i), as contained in 26 CFR part 1, revised 
as of April 1, 2011.


Sec.  1.355-0T  [Removed]

0
Par. 5. Section 1.355-0T is removed.


Sec.  1.355-2T  [Removed]

0
Par. 6. Section 1.355-2T is removed.

Steven T. Miller,
Deputy Commissioner for Services and Enforcement.
    Approved: October 14, 2011.
 Emily S. McMahon,
Acting Assistant Secretary of the Treasury (Tax Policy).
[FR Doc. 2011-27240 Filed 10-19-11; 8:45 am]
BILLING CODE 4830-01-P