Guidance Regarding the Treatment of Stock of a Controlled Corporation Under Section 355(a)(3)(B), 75946-75951 [E8-29544]

Download as PDF 75946 Federal Register / Vol. 73, No. 241 / Monday, December 15, 2008 / Rules and Regulations 7430(e); 22 U.S.C. 287c, 22 U.S.C. 3201 et seq., 22 U.S.C. 6004; 30 U.S.C. 185(s), 185(u); 42 U.S.C. 2139a; 42 U.S.C. 6212; 43 U.S.C. 1354; 46 U.S.C. app. 466c; 50 U.S.C. app. 5; 22 U.S.C. 7201 et seq.; 22 U.S.C. 7210; E.O. 13026, 61 FR 58767, 3 CFR, 1996 Comp., p. 228; E.O. 13222, 66 FR 44025, 3 CFR, 2001 Comp., p. 783; Notice of July 23, 2008, 73 FR 43603 (July 25, 2008). 22. In supplement No. 1 to part 774, Category 1, Export Control Classification Number 1C202, revise the heading to read as follows: ■ 1C202 Alloys other than those controlled by 1C002.b.3 or 1C002.b.4 as follows (see List of Items Controlled) * * * * * 24. In Supplement No. 1 to part 774, Category 5 ‘‘Telecommunications and Information Security’’, Part I— ‘‘Telecommunications’’, immediately following the text of Export Control Classification Number 5B001 and immediately preceding the header that reads ‘‘C. Materials’’ add Export Control Classification Number 5B991 to read as follows: ■ 5B991 n.e.s. 27. In Supplement No. 1 to part 774, Category 5 ‘‘Telecommunications and Information Security’’, Part II— ‘‘Information Security,’’ immediately following Export Control Classification Number 5A992 and immediately preceding Export Control classification Number 5B002, insert a heading reading ‘‘B. Test, Inspection and Production Equipment.’’ ■ 28. In Supplement No. 1 to part 774, Category 5 ‘‘Telecommunications and Information Security’’, Part II— ‘‘Information Security,’’ immediately following the text of Export Control Classification Number 5D992 and immediately preceding Export Control Classification Number 5E002 revise the header that reads ‘‘Technology’’ to read ‘‘E. Technology’’. ■ Dated: December 8, 2008. Christopher R. Wall, Assistant Secretary for Export Administration. [FR Doc. E8–29604 Filed 12–12–08; 8:45 am] BILLING CODE 3510–33–P Telecommunications test equipment, DEPARTMENT OF THE TREASURY License Requirements Reason for Control: AT Internal Revenue Service Control(s) AT applies to entire entry ... Country chart AT Column 1. 26 CFR Part 1 [TD 9435] RIN 1545–BH61 License Exceptions LVS: N/A GBS: N/A CIV: N/A Guidance Regarding the Treatment of Stock of a Controlled Corporation Under Section 355(a)(3)(B) List of Items Controlled Unit: $ value Related Controls: N/A Related Definitions: N/A Items: The list of items controlled is contained in the ECCN heading. 25. In Supplement No. 1 to part 774, Category 5 ‘‘Telecommunications and Information Security’’, Part II ‘‘Information Security,’’ immediately following the end of Note 3, paragraph .d and immediately preceding Export Control Classification Number 5A002 revise the header that reads ‘‘Systems, Equipment and Components’’ to read ‘‘A. Systems, Equipment and Components’’ ■ 26. In Supplement No. 1 to part 774, Category 5 ‘‘Telecommunications and Information Security’’, Part II ‘‘Information Security,’’ immediately following Export Control Classification Number 5A002 and immediately preceding Export Control classification Number 5A992, remove the heading that reads ‘‘Part 2—Information Security.’’ pwalker on PROD1PC71 with RULES ■ VerDate Aug<31>2005 16:19 Dec 12, 2008 Jkt 217001 AGENCY: Internal Revenue Service (IRS), Treasury. ACTION: Final and temporary regulations. SUMMARY: This document contains final and temporary regulations that provide guidance 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 temporary regulations will affect corporations and their shareholders. The text of these temporary regulations also serves as the text of the proposed regulations set forth in the notice of proposed rulemaking on this subject in the Proposed Rules section in this issue of the Federal Register. DATES: Effective Date: These final and temporary regulations are effective on December 15, 2008. Applicability Date: For dates of applicability, see § 1.355–2T(i). PO 00000 Frm 00020 Fmt 4700 Sfmt 4700 FOR FURTHER INFORMATION CONTACT: Russell P. Subin, (202) 622–7790 (not a toll-free number). SUPPLEMENTARY INFORMATION: Background Section 355 provides the rules for taxfree distributions of the stock of certain controlled corporations. Since 2006 Congress has enacted several amendments to section 355. See sections 202 and 507 of the Tax Increase Prevention and Reconciliation Act of 2005, Public Law 109–222 (120 Stat. 345); Division A, Section 410 of the Tax Relief and Health Care Act of 2006, Public Law 109–432 (120 Stat. 2922, 2963); Section 4(b) of the Tax Technical Corrections Act of 2007, Public Law 110–172 (121 Stat. 2473, 2476) (Technical Corrections). Furthermore, the IRS and Treasury Department have issued proposed § 1.355–3 (72 FR 26012 (May 8, 2007), 2007–23 IRB 1357), which would provide guidance regarding satisfaction of the active trade or business (ATB) requirement of section 355(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. For this purpose, control is defined under section 368(c). 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 or taxable acquisition), 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 predistribution period in a taxable E:\FR\FM\15DER1.SGM 15DER1 pwalker on PROD1PC71 with RULES Federal Register / Vol. 73, No. 241 / Monday, December 15, 2008 / Rules and Regulations transaction. For purposes of section 355(b)(2)(D), all distributee corporations that are members of the same affiliated group (as defined in section 1504(a) without regard to section 1504(b)) shall be treated as one distributee corporation. 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(b)(3)(A) through (C) are collectively referred to in this preamble as the SAG regime. In addition, for purposes of this preamble, the term DSAG means the SAG of which distributing is the common parent, CSAG means the SAG of which controlled is the common parent, and generally the ‘‘SAG’’ of a corporation means the SAG of which such corporation is the common parent. In addition, throughout this preamble, references to DSAG and CSAG include a reference to distributing and controlled, respectively, where such respective corporation is not the common parent of a SAG (for example, such corporation has no subsidiaries). 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 (hot stock rule). Stock treated as other property under section 355(a)(3)(B) is referred to in this preamble as hot stock. Section 1.355–2(g) (as applied prior to the applicability of these temporary regulations) (former § 1.355–2(g)) provides that for purposes of section 355(a)(1)(A), stock of controlled acquired in a taxable transaction (other than a transaction described in § 1.355– 3(b)(4)(iii)) within the pre-distribution VerDate Aug<31>2005 16:19 Dec 12, 2008 Jkt 217001 period shall not be treated as stock of controlled but shall be treated as ‘‘other property.’’ However, for purposes of section 355(a)(1)(D), the stock so acquired is stock of controlled. 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 this grant of authority, these temporary regulations modify the application of section 355(a)(3)(B) in order to harmonize the hot stock rule and section 355(b). Explanation of Provisions 1. Hot Stock Rule Inapplicable Where Controlled Is a DSAG Member Congress enacted section 355(b)(3) because it was concerned that, prior to a distribution under section 355, corporate groups conducting business in separate corporate entities often had to undergo elaborate restructurings to place active businesses in the proper entities to satisfy the ATB requirement. See, for example, H.R. Rep. No. 109– 304, at 53, 54 (2005). The effect of section 355(b)(3) is to treat a corporation’s SAG as a single corporation for purposes of the ATB requirement. Consistent with this treatment, Congress enacted the Technical Corrections to clarify: that if a corporation became a member of a separate affiliated group as a result of one or more transactions in which gain or loss was recognized in whole or in part, any trade or business conducted by such corporation (at the time that such corporation became such a member) is treated for purposes of section 355(b)(2) as acquired in a transaction in which gain or loss was recognized in whole or in part. Accordingly, such an acquisition is subject to the provisions of section 355(b)(2)(C), and may qualify as an expansion of an existing active trade or business conducted by the distributing corporation or the controlled corporation, as the case may be. The provision clarifies that the Treasury Department shall prescribe regulations that provide for the proper application of sections 355(b)(2)(B), (C), and (D) in the case of any corporation that is tested for active business under the separate affiliated group rule, and that modify the application of section 355(a)(3)(B) in the case of such a corporation in a manner consistent with the purposes of the provision. 153 Cong. Rec. S16057 (daily ed. Dec. 19, 2007) (Joint Committee on Taxation’s explanation of H.R. 4839, which explanation was printed in the PO 00000 Frm 00021 Fmt 4700 Sfmt 4700 75947 Congressional Record at the request of Senator Baucus, who stated that the explanation expressed the Senate Finance Committee’s understanding of the bill). Accordingly, the SAG regime affords a group a certain amount of flexibility regarding the satisfaction of the ATB requirement. For example, Congress indicated that, for purposes of section 355(b), in certain circumstances a stock acquisition will be treated in a manner comparable to an asset acquisition and, as such, may constitute an expansion of an existing trade or business. The IRS and Treasury Department have further interpreted the SAG regime to disregard acquisitions of additional stock of a current subsidiary SAG member for purposes of satisfying the ATB requirement. See proposed § 1.355– 3(b)(1)(ii). Although the SAG regime is not applicable for purposes of section 355(a)(3)(B), the Technical Corrections provide a specific grant of regulatory authority indicating that the application of the hot stock rule may be modified to apply in a manner consistent with the SAG regime of section 355(b)(3). Toward that end, these temporary regulations reflect the fundamental conclusion that the hot stock rule should not apply to any acquisition of stock of controlled where controlled is a DSAG member at any time after the acquisition (but prior to the distribution of controlled). Such a conclusion resolves conflicts that would otherwise arise under section 355(a)(3)(B) and section 355(b). For example, suppose distributing acquired all of controlled’s stock in a taxable transaction that qualified as an expansion of distributing’s existing trade or business under the SAG regime, and later distributed all such stock within five years of the acquisition in an unrelated transaction. The distribution would satisfy the ATB requirement but, absent the rule reflected in these temporary regulations, could otherwise be fully taxable under the hot stock rule. Such a result seems inconsistent with Congressional intent. Similarly, to achieve consistency with the SAG regime, if controlled is a DSAG member and distributing acquires additional controlled stock, such acquisition should be disregarded for purposes of section 355(a)(3)(B). Therefore, these temporary regulations generally provide that controlled stock acquired by the DSAG within the pre-distribution period in a taxable transaction constitutes hot stock, except if controlled is a DSAG member at any time after the acquisition (but prior to the distribution of controlled). E:\FR\FM\15DER1.SGM 15DER1 75948 Federal Register / Vol. 73, No. 241 / Monday, December 15, 2008 / Rules and Regulations Accordingly, each of Rev. Rul. 76–54 (1976–1 CB 96) and Rev. Rul. 65–286 (1965–2 CB 92) is obsolete. 2. Transfers Among DSAG Members Consistent with the SAG regime, which treats the DSAG as a single corporation, transfers of controlled stock owned by DSAG members immediately before and immediately after the transfer are disregarded and are not treated as acquisitions for purposes of the hot stock rule. Compare proposed § 1.355–3(b)(1)(ii) (applying a similar rule for purposes of the ATB requirement). 3. Hot Stock Rule Inapplicable to Acquisitions From Certain Affiliates Former § 1.355–2(g) provided that the hot stock rule did not apply to acquisitions of controlled stock in a transaction described in § 1.355– 3(b)(4)(iii) (affiliate exception). In other words, former § 1.355–2(g) generally exempted from the hot stock rule an acquisition of controlled stock by distributing from a member of the affiliated group (as defined in § 1.355– 3(b)(4)(iv)) of which distributing was a member. Compare Notice 2007–60, 2007–2 CB 466 (IRS will not challenge applicability of § 1.355–3(b)(4)(iii) to distributions effected on or before date temporary or final regulations modifying § 1.355–3(b)(4)(iii) are published). These temporary regulations retain the affiliate exception of former § 1.355–2(g) (including its treatment of stock described in section 1504(a)(4)). The IRS and Treasury Department, however, continue to study what impact transfers between affiliates should have on the satisfaction of the ATB requirement and the application of the hot stock rule and believe that, when finalized, the rules regarding the ATB requirement and the hot stock rule should generally be applied consistently with respect to transactions between affiliates. pwalker on PROD1PC71 with RULES 4. Future Guidance Under Section 355(a)(3)(B) The IRS and Treasury Department are considering issuing additional guidance under section 355(a)(3)(B), as described in this section 4 of the preamble. Such guidance would be in addition to, rather than in replacement of, these temporary regulations. In the Proposed Rules section in this issue of the Federal Register (REG–150670–07), comments are requested regarding these temporary regulations and the issues described in this preamble. VerDate Aug<31>2005 16:19 Dec 12, 2008 Jkt 217001 A. Dunn Trust and Predecessor Issues Section 355(a)(3)(B) applies to controlled stock acquired by reason of any transaction during the predistribution period in which gain or loss is recognized in whole or in part. The primary types of transactions for which the IRS and Treasury Department are considering issuing additional guidance generally involve the effect of indirect acquisitions and the extent to which predecessor rules should apply for purposes of the hot stock rule. Although the IRS and Treasury Department are considering addressing in future guidance the issues arising in transactions described in this section 4.A. of the preamble, no inference should be drawn regarding the present application of section 355(a)(3)(B), including these temporary regulations, to such transactions. For example, future guidance may address whether, in a situation where a corporation that owns controlled stock joins the DSAG in a taxable transaction, the DSAG is treated as acquiring the controlled stock in a taxable transaction. Compare section 355(b)(3)(B); proposed § 1.355–3(b)(1)(ii) and (b)(4)(i). Similarly, guidance may address the treatment of taxable acquisitions of controlled stock during the predistribution period by a corporation that subsequently joins the DSAG in a nontaxable transaction. The IRS and Treasury Department are also considering issuing additional guidance that treats the DSAG as making any acquisition made by a predecessor of a DSAG member. Compare H.R. Rep. No. 83–2543, at 38 (1954) (Conf. Rep.) (‘‘by reason of’’ language of section 355(a)(3)(B) encompasses purchase of controlled stock by a corporation that is in control of distributing prior to ‘‘downstairs merger’’ by such purchaser into distributing). For this purpose, a predecessor of a corporation would be a corporation that transfers its assets to such corporation in a transaction to which section 381(a) applies. Such guidance would address the circumstances in which a predecessor of distributing (or predecessor of a DSAG member) effects an acquisition of controlled stock described in section 355(a)(3)(B). Additionally, if a DSAG acquires stock of a corporation (target) during the pre-distribution period in a taxable transaction and such target is subsequently acquired by controlled in a section 381(a) transaction, the earlier taxable acquisition of target stock may implicate section 355(a)(3)(B). A conceptually similar issue was PO 00000 Frm 00022 Fmt 4700 Sfmt 4700 addressed in Dunn Trust v. Commissioner, 86 T.C. 745 (1986), acq. (1998–1 CB 5 n. 4 (acquiescing in result only)), except that in Dunn Trust the target that was acquired by distributing was not subsequently acquired by controlled in a section 381(a) transaction. Instead, in Dunn Trust, distributing acquired stock of target in a taxable transaction and subsequently contributed such target stock (which stock could not have been distributed without violating section 355(a)(3)(B)) to controlled in exchange for controlled stock in a nontaxable transaction. The Tax Court ruled that the controlled stock was not hot stock under section 355(a)(3)(B). Where distributing acquires target stock in a taxable transaction, and the target is subsequently either combined with controlled in a nontaxable section 381(a) transaction or (as in Dunn Trust) acquired by controlled in a nontaxable stock acquisition, the IRS and Treasury Department believe that such acquisitions raise an issue as to whether target or controlled is the ‘‘real controlled’’ for purposes of section 355(a)(3)(B). Identifying the ‘‘real controlled’’ might be illustrated by the following example. Assume that distributing owns an amount of stock in controlled that constitutes control within the meaning of section 368(c) but which does not meet the requirements of section 1504(a)(2). Controlled, in turn, owns stock of a target subsidiary that satisfies the requirements of section 1504(a)(2). Distributing acquires additional target stock in a taxable transaction, which stock is then contributed to controlled in exchange for additional controlled stock in a transaction to which section 351(a) applies. Assume that neither controlled nor target joins the DSAG after either step. The question under section 355(a)(3)(B) is whether a target whose stock is acquired by the DSAG in a taxable transaction should be treated as the ‘‘real controlled’’, where such additional target stock is subsequently acquired by the actual controlled (or, in some cases, a CSAG member) in a nontaxable transaction. The IRS and Treasury Department are considering issuing guidance that would provide that a target whose stock is acquired by distributing in a taxable transaction may be treated as the ‘‘real controlled’’ for purposes of section 355(a)(3)(B) if, at the time of the distribution, the CSAG cannot satisfy the requirements of section 355(b) without taking into account an ATB conducted by the target at the time the DSAG acquired the stock of the target in the taxable transaction. E:\FR\FM\15DER1.SGM 15DER1 Federal Register / Vol. 73, No. 241 / Monday, December 15, 2008 / Rules and Regulations In other words, section 355(a)(3)(B) could be implicated as a result of an acquisition of target stock if the target is engaged in an ATB at the time the DSAG acquires the target stock in a taxable transaction, the target stock is then acquired by controlled (or, in some cases, a CSAG member) prior to the distribution, and at the time of the distribution of the controlled stock the CSAG is not able to satisfy the requirements of section 355(b) without taking into account an ATB that was being conducted by the target at the time the DSAG acquired the target stock in the taxable transaction. pwalker on PROD1PC71 with RULES B. Issuances of Controlled Stock Outside the Dunn Trust or Predecessor Context The IRS and Treasury Department are considering additional guidance that would generally provide that issuances of controlled stock by controlled to distributing in a taxable transaction do not give rise to hot stock. For example, such an acquisition may occur where section 357(c) applies (see Rev. Rul. 78– 442, (1978–2 CB 143) (distributing transfers a business to wholly-owned controlled, which assumes distributing’s liabilities)). As noted in Rev. Rul. 78– 442, the IRS and Treasury Department believe that section 355(b)(2)(C) was not intended to apply to such an acquisition of a trade or business by controlled from distributing under the facts of that ruling even if it is a taxable transaction because the acquisition was not from an ‘‘outside party’’. ‘‘[F]or the same reasons, section 355(a)(3)[(B)] * * * is not applicable to the distribution’’ of controlled stock acquired in such a transaction. The IRS and Treasury Department request comments regarding the extent to which issuances by controlled of controlled stock to distributing in taxable transactions should not give rise to hot stock, whether distributing must own some minimum percentage in controlled at the time of such issuance in order for such an acquisition to be excepted from section 355(a)(3)(B), and the extent to which such transactions are adequately addressed under section 355(a)(1)(B) (relating to device) and section 355(g) (relating to distributions involving disqualified investment corporations). C. Redemptions of Controlled Stock Finally, the IRS and Treasury Department request comments regarding the effect of redemptions of controlled stock under section 355(a)(3)(B). Generally, if the controlled shares distributed by distributing were not acquired by distributing during the predistribution period, such shares cannot VerDate Aug<31>2005 16:19 Dec 12, 2008 Jkt 217001 be hot stock. Therefore, a redemption by controlled of its stock from unrelated parties generally should not cause any portion of distributing’s controlled stock to become hot stock. Such a rule may be distinguishable from the rule under section 355(b)(2)(D). See McLaulin v. Commissioner, 276 F.3d 1269 (11th Cir. 2001) (applying section 355(b)(2)(D) when distributing acquired control of a subsidiary through a redemption of subsidiary stock), and Rev. Rul. 57–144 (1957–1 CB 123) (same). The distinction can be made based on the different focus of the provisions. Section 355(a)(3)(B) provides that controlled stock ‘‘acquired by the distributing corporation’’ during the pre-distribution period in a taxable transaction is hot stock, and is directed at the property distributed to the distributing shareholders. In a redemption, generally no additional shares of stock are acquired by distributing, and generally no additional value is distributed to the distributing shareholders. In contrast, section 355(b)(2)(D) prohibits the acquisition of ‘‘control of a corporation.’’ Control is a requisite status in order for distributing to distribute the stock of controlled to its shareholders under section 355. A redemption can confer this status on distributing without distributing’s acquiring any additional shares of stock. However, for purposes of section 355(a)(3)(B), the IRS and Treasury Department believe that a redemption of controlled stock from a shareholder other than distributing is the equivalent of distributing’s purchase of controlled stock from the redeemed shareholder to the extent distributing is the source of funds for the redemption. Further, the IRS and Treasury Department are studying whether there are other situations in which distributing’s increased percentage ownership in controlled resulting from redemptions of controlled stock from a shareholder other than distributing should be treated as hot stock. 5. Request for Comments In the Proposed Rules section in this issue of the Federal Register (REG– 150670–07), the IRS and Treasury Department are requesting comments regarding these temporary regulations, including comments on whether section 355(a)(3)(B) should use the same definition of taxable transaction as section 355(b), whether the exception for acquisitions from certain affiliates should be the same for both provisions, and the other issues described in this preamble. PO 00000 Frm 00023 Fmt 4700 Sfmt 4700 75949 Effective/Applicability Date These temporary regulations are generally applicable for distributions occurring after December 15, 2008. However, unless taxpayers elect otherwise, these temporary regulations do not apply to any distribution occurring after December 15, 2008 that is pursuant to a transaction which is (1) made pursuant to an agreement which was binding on December 15, 2008, and at all times thereafter; (2) described in a ruling request submitted to the IRS on or before such date; or (3) described on or before such date in a public announcement or in a filing with the Securities and Exchange Commission. Furthermore, taxpayers may elect to apply these temporary regulations retroactively to distributions to which section 4(b) of the Technical Corrections applies (generally to distributions occurring after May 17, 2006). Effect on Other Documents The following publications are obsolete as of the applicability of these temporary regulations: Rev. Rul. 76–54 (1976–1 CB 96). Rev. Rul. 65–286 (1965–2 CB 92). 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. These temporary regulations provide taxpayers with relief from the application of section 355(a)(3)(B) in certain situations. For this reason, it has been determined, pursuant to 5 U.S.C. 553(b)(B), that good cause exists for dispensing with the notice and public comment procedures and that, pursuant to 5 U.S.C. 553(d)(3), good cause exists to dispense with a delayed effective date. For the applicability of the Regulatory Flexibility Act refer to the Special Analyses section of the preamble to the cross-reference notice of proposed rulemaking published in the Proposed Rules section in this issue of the Federal Register. Pursuant to section 7805(f) of the Code, these regulations have been 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 temporary 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. E:\FR\FM\15DER1.SGM 15DER1 75950 Federal Register / Vol. 73, No. 241 / Monday, December 15, 2008 / Rules and Regulations Availability of IRS Documents Documents published in the IRB cited in this preamble are available from 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. Amendments to the Regulations Accordingly, 26 CFR part 1 is amended as follows: ■ PART 1—INCOME TAXES ■ 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 1.355–2T(g) also issued under 26 U.S.C. 355(b)(3)(D). * * * ■ Par. 2. Section 1.355–0 is amended by amending the entry under § 1.355–2 to revise paragraph (g) and add paragraph (i) to read as follows: § 1.355–0 Outline of sections. * * * § 1.355–2 * * Limitations. * * * * * (g) [Reserved]. * * * * * (i) [Reserved]. ■ Par. 3. Section 1.355–0T is added to read as follows: This section lists the major paragraphs under § 1.355–2T. pwalker on PROD1PC71 with RULES Limitations (temporary). (a) through (f)(2) [Reserved]. For further guidance, see the entries for § 1.355–2(a) through (f)(2) in § 1.355–0. (g) Recently acquired controlled stock under section 355(a)(3)(B). (1) Other property. (2) Exceptions. (3) DSAG. (4) Taxable transaction. (5) Examples. (h) [Reserved]. For further guidance, see the entry for § 1.355–2(h) in § 1.355– 0. (i) Effective/applicability date. (1) In general. (2) Transition election. (3) Retroactive election. (4) Manner of election. (5) Prior law. (6) Expiration date. ■ Par. 4. Section 1.355–1 is amended by revising paragraph (a) to read as follows: VerDate Aug<31>2005 16:19 Dec 12, 2008 Jkt 217001 (a) Effective/applicability date of certain sections. Except as otherwise provided, this section and §§ 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 §§ 1.355–2 through 1.355–4, other than § 1.355–2(g), 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 §§ 1.355–2T(g), 1.355–5, 1.355–6 and 1.355–7, see §§ 1.355–2T(i), 1.355–5(e), 1.355–6(g), and 1.355–7(k), respectively. * * * * * ■ Par. 5. Section 1.355–2 is amended by revising paragraph (g) and adding paragraph (i) to read as follows: § 1.355–2 Limitations. * * * * * (g) [Reserved]. For further guidance, see § 1.355–2T(g). * * * * * (i) [Reserved]. For further guidance, see § 1.355–2T(i). ■ Par. 6. Section 1.355–2T is added to read as follows: § 1.355–2T § 1.355–0T Outline of sections (temporary). § 1.355–2T § 1.355–1 Distribution of stock and securities of a controlled corporation. Limitations (temporary). (a) through (f)(2) [Reserved]. For further guidance, see § 1.355–2(a) through (f)(2). (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 § 1.355–3(b)(4)(iii). PO 00000 Frm 00024 Fmt 4700 Sfmt 4700 (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 E:\FR\FM\15DER1.SGM 15DER1 Federal Register / Vol. 73, No. 241 / Monday, December 15, 2008 / Rules and Regulations pwalker on PROD1PC71 with RULES 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 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 § 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. (h) [Reserved]. For further guidance, see § 1.355–2(h). (i) Effective/applicability date—(1) In general. Paragraphs (g)(1) through (g)(5) of this section apply to distributions occurring after December 15, 2008. However, except as provided in paragraph (i)(2) of this section, paragraphs (g)(1) through (g)(5) of this section do not apply to any distribution occurring after December 15, 2008 that is pursuant to a transaction which is— (i) Made pursuant to an agreement which was binding on December 15, 2008, and at all times thereafter; (ii) Described in a ruling request submitted to the Internal Revenue Service on or before such date; or VerDate Aug<31>2005 16:19 Dec 12, 2008 Jkt 217001 (iii) Described on or before such date in a public announcement or in a filing with the Securities and Exchange Commission. (2) Transition election. In the case of any distribution described in the second sentence of paragraph (i)(1) of this section, taxpayers may elect to apply all of paragraphs (g)(1) through (g)(5) of this section. However, neither the distributing corporation nor any person related to the distributing corporation within the meaning of section 267(b) (determined immediately before or immediately after the distribution) may make such an election with respect to a distribution unless all such persons make such an election with respect to such distribution. (3) Retroactive election. In the case of any distribution occurring on or before December 15, 2008, taxpayers may elect to apply all of paragraphs (g)(1) through (g)(5) of this section to distributions to which section 4(b) of the Tax Technical Corrections Act of 2007, Public Law 110–172 (121 Stat. 2473, 2476) applies (generally applicable to distributions made after May 17, 2006, as provided in section 4(d) of that act). However, neither the distributing corporation nor any person related to the distributing corporation within the meaning of section 267(b) (determined immediately before or immediately after the distribution) may make such an election with respect to a distribution unless all such persons make such an election with respect to such distribution. (4) Manner of election. Taxpayers may make any election available under this paragraph (i) by applying the selected rule on its original or amended return. (5) Prior law. For distributions to which paragraphs (g)(1) through (g)(5) of this section do not apply, see § 1.355– 2(g), as contained in 26 CFR part 1, revised as of April 1, 2008. (6) Expiration date. The applicability of paragraph (i) of this section will expire on December 15, 2011. Steve T. Miller, (Acting) Deputy Commissioner for Services and Enforcement. Eric Solomon, Assistant Secretary of the Treasury (Tax Policy). [FR Doc. E8–29544 Filed 12–12–08; 8:45 am] BILLING CODE 4830–01–P PO 00000 Frm 00025 Fmt 4700 Sfmt 4700 75951 DEPARTMENT OF HOMELAND SECURITY Coast Guard 33 CFR Part 110 [Docket No. USCG–2008–0497] RIN 1625–AA01 Special Anchorage Area ‘‘A’’, Boston Harbor, MA Coast Guard, DHS. Final rule. AGENCY: ACTION: SUMMARY: The Coast Guard hereby amends the Boston Inner Harbor Special Anchorage Area ‘‘A’’ at the entrance to Fort Point Channel in Boston Harbor, Boston, MA at the request of the Boston Harbormaster and the Boston Harbor Yacht Club. This action will provide additional anchorage space and provide a safe and secure anchorage for vessels of not more than 65 feet in length. DATES: This rule is effective January 14, 2009. ADDRESSES: Comments and material received from the public, as well as documents mentioned in this preamble as being available in the docket, are part of docket USCG–2008–0497 and are available online by going to http:// www.regulations.gov, selecting the Advanced Docket Search option on the right side of the screen, inserting USCG– 2008–0497 in the Docket ID box, pressing Enter, and then clicking on the item in the Docket ID column. This material is also available for inspection or copying at two locations: The Docket Management Facility (M–30), U.S. Department of Transportation, West Building Ground Floor, Room W12–140, 1200 New Jersey Avenue, SE., Washington, DC 20590, between 9 a.m. and 5 p.m., Monday through Friday, except Federal holidays; and the Commander (dpw), First Coast Guard District, 408 Atlantic Ave., Boston, MA 02110 between 7 a.m. and 3 p.m., Monday through Friday, except Federal holidays. FOR FURTHER INFORMATION CONTACT: If you have questions on this rule, call Mr. John J. Mauro, Commander (dpw), First Coast Guard District, 408 Atlantic Ave., Boston, MA 02110, Telephone (617) 223–8355 or e-mail John.J.Mauro@uscg.mil. If you have questions on viewing the docket, call Renee V. Wright, Program Manager, Docket Operations, telephone 202–366– 9826. SUPPLEMENTARY INFORMATION: E:\FR\FM\15DER1.SGM 15DER1

Agencies

[Federal Register Volume 73, Number 241 (Monday, December 15, 2008)]
[Rules and Regulations]
[Pages 75946-75951]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: E8-29544]


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DEPARTMENT OF THE TREASURY

Internal Revenue Service

26 CFR Part 1

[TD 9435]
RIN 1545-BH61


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

AGENCY: Internal Revenue Service (IRS), Treasury.

ACTION: Final and temporary regulations.

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SUMMARY: This document contains final and temporary regulations that 
provide guidance 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 temporary regulations will 
affect corporations and their shareholders. The text of these temporary 
regulations also serves as the text of the proposed regulations set 
forth in the notice of proposed rulemaking on this subject in the 
Proposed Rules section in this issue of the Federal Register.

DATES: Effective Date: These final and temporary regulations are 
effective on December 15, 2008.
    Applicability Date: For dates of applicability, see Sec.  1.355-
2T(i).

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

SUPPLEMENTARY INFORMATION:

Background

    Section 355 provides the rules for tax-free distributions of the 
stock of certain controlled corporations. Since 2006 Congress has 
enacted several amendments to section 355. See sections 202 and 507 of 
the Tax Increase Prevention and Reconciliation Act of 2005, Public Law 
109-222 (120 Stat. 345); Division A, Section 410 of the Tax Relief and 
Health Care Act of 2006, Public Law 109-432 (120 Stat. 2922, 2963); 
Section 4(b) of the Tax Technical Corrections Act of 2007, Public Law 
110-172 (121 Stat. 2473, 2476) (Technical Corrections). Furthermore, 
the IRS and Treasury Department have issued proposed Sec.  1.355-3 (72 
FR 26012 (May 8, 2007), 2007-23 IRB 1357), which would provide guidance 
regarding satisfaction of the active trade or business (ATB) 
requirement of section 355(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. For this 
purpose, control is defined under section 368(c).
    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 or taxable acquisition), 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

[[Page 75947]]

transaction. For purposes of section 355(b)(2)(D), all distributee 
corporations that are members of the same affiliated group (as defined 
in section 1504(a) without regard to section 1504(b)) shall be treated 
as one distributee corporation.
    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(b)(3)(A) through (C) are collectively referred to in this 
preamble as the SAG regime. In addition, for purposes of this preamble, 
the term DSAG means the SAG of which distributing is the common parent, 
CSAG means the SAG of which controlled is the common parent, and 
generally the ``SAG'' of a corporation means the SAG of which such 
corporation is the common parent. In addition, throughout this 
preamble, references to DSAG and CSAG include a reference to 
distributing and controlled, respectively, where such respective 
corporation is not the common parent of a SAG (for example, such 
corporation has no subsidiaries).
    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 (hot 
stock rule). Stock treated as other property under section 355(a)(3)(B) 
is referred to in this preamble as hot stock.
    Section 1.355-2(g) (as applied prior to the applicability of these 
temporary regulations) (former Sec.  1.355-2(g)) provides that for 
purposes of section 355(a)(1)(A), stock of controlled acquired in a 
taxable transaction (other than a transaction described in Sec.  1.355-
3(b)(4)(iii)) within the pre-distribution period shall not be treated 
as stock of controlled but shall be treated as ``other property.'' 
However, for purposes of section 355(a)(1)(D), the stock so acquired is 
stock of controlled.
    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 this grant of authority, 
these temporary regulations modify the application of section 
355(a)(3)(B) in order to harmonize the hot stock rule and section 
355(b).

Explanation of Provisions

1. Hot Stock Rule Inapplicable Where Controlled Is a DSAG Member

    Congress enacted section 355(b)(3) because it was concerned that, 
prior to a distribution under section 355, corporate groups conducting 
business in separate corporate entities often had to undergo elaborate 
restructurings to place active businesses in the proper entities to 
satisfy the ATB requirement. See, for example, H.R. Rep. No. 109-304, 
at 53, 54 (2005). The effect of section 355(b)(3) is to treat a 
corporation's SAG as a single corporation for purposes of the ATB 
requirement. Consistent with this treatment, Congress enacted the 
Technical Corrections to clarify:

that if a corporation became a member of a separate affiliated group 
as a result of one or more transactions in which gain or loss was 
recognized in whole or in part, any trade or business conducted by 
such corporation (at the time that such corporation became such a 
member) is treated for purposes of section 355(b)(2) as acquired in 
a transaction in which gain or loss was recognized in whole or in 
part. Accordingly, such an acquisition is subject to the provisions 
of section 355(b)(2)(C), and may qualify as an expansion of an 
existing active trade or business conducted by the distributing 
corporation or the controlled corporation, as the case may be.
    The provision clarifies that the Treasury Department shall 
prescribe regulations that provide for the proper application of 
sections 355(b)(2)(B), (C), and (D) in the case of any corporation 
that is tested for active business under the separate affiliated 
group rule, and that modify the application of section 355(a)(3)(B) 
in the case of such a corporation in a manner consistent with the 
purposes of the provision.

153 Cong. Rec. S16057 (daily ed. Dec. 19, 2007) (Joint Committee on 
Taxation's explanation of H.R. 4839, which explanation was printed in 
the Congressional Record at the request of Senator Baucus, who stated 
that the explanation expressed the Senate Finance Committee's 
understanding of the bill).
    Accordingly, the SAG regime affords a group a certain amount of 
flexibility regarding the satisfaction of the ATB requirement. For 
example, Congress indicated that, for purposes of section 355(b), in 
certain circumstances a stock acquisition will be treated in a manner 
comparable to an asset acquisition and, as such, may constitute an 
expansion of an existing trade or business. The IRS and Treasury 
Department have further interpreted the SAG regime to disregard 
acquisitions of additional stock of a current subsidiary SAG member for 
purposes of satisfying the ATB requirement. See proposed Sec.  1.355-
3(b)(1)(ii).
    Although the SAG regime is not applicable for purposes of section 
355(a)(3)(B), the Technical Corrections provide a specific grant of 
regulatory authority indicating that the application of the hot stock 
rule may be modified to apply in a manner consistent with the SAG 
regime of section 355(b)(3). Toward that end, these temporary 
regulations reflect the fundamental conclusion that the hot stock rule 
should not apply to any acquisition of stock of controlled where 
controlled is a DSAG member at any time after the acquisition (but 
prior to the distribution of controlled).
    Such a conclusion resolves conflicts that would otherwise arise 
under section 355(a)(3)(B) and section 355(b). For example, suppose 
distributing acquired all of controlled's stock in a taxable 
transaction that qualified as an expansion of distributing's existing 
trade or business under the SAG regime, and later distributed all such 
stock within five years of the acquisition in an unrelated transaction. 
The distribution would satisfy the ATB requirement but, absent the rule 
reflected in these temporary regulations, could otherwise be fully 
taxable under the hot stock rule. Such a result seems inconsistent with 
Congressional intent. Similarly, to achieve consistency with the SAG 
regime, if controlled is a DSAG member and distributing acquires 
additional controlled stock, such acquisition should be disregarded for 
purposes of section 355(a)(3)(B).
    Therefore, these temporary regulations generally provide that 
controlled stock acquired by the DSAG within the pre-distribution 
period in a taxable transaction constitutes hot stock, except if 
controlled is a DSAG member at any time after the acquisition (but 
prior to the distribution of controlled).

[[Page 75948]]

Accordingly, each of Rev. Rul. 76-54 (1976-1 CB 96) and Rev. Rul. 65-
286 (1965-2 CB 92) is obsolete.

2. Transfers Among DSAG Members

    Consistent with the SAG regime, which treats the DSAG as a single 
corporation, transfers of controlled stock owned by DSAG members 
immediately before and immediately after the transfer are disregarded 
and are not treated as acquisitions for purposes of the hot stock rule. 
Compare proposed Sec.  1.355-3(b)(1)(ii) (applying a similar rule for 
purposes of the ATB requirement).

3. Hot Stock Rule Inapplicable to Acquisitions From Certain Affiliates

    Former Sec.  1.355-2(g) provided that the hot stock rule did not 
apply to acquisitions of controlled stock in a transaction described in 
Sec.  1.355-3(b)(4)(iii) (affiliate exception). In other words, former 
Sec.  1.355-2(g) generally exempted from the hot stock rule an 
acquisition of controlled stock by distributing from a member of the 
affiliated group (as defined in Sec.  1.355-3(b)(4)(iv)) of which 
distributing was a member. Compare Notice 2007-60, 2007-2 CB 466 (IRS 
will not challenge applicability of Sec.  1.355-3(b)(4)(iii) to 
distributions effected on or before date temporary or final regulations 
modifying Sec.  1.355-3(b)(4)(iii) are published). These temporary 
regulations retain the affiliate exception of former Sec.  1.355-2(g) 
(including its treatment of stock described in section 1504(a)(4)). The 
IRS and Treasury Department, however, continue to study what impact 
transfers between affiliates should have on the satisfaction of the ATB 
requirement and the application of the hot stock rule and believe that, 
when finalized, the rules regarding the ATB requirement and the hot 
stock rule should generally be applied consistently with respect to 
transactions between affiliates.

4. Future Guidance Under Section 355(a)(3)(B)

    The IRS and Treasury Department are considering issuing additional 
guidance under section 355(a)(3)(B), as described in this section 4 of 
the preamble. Such guidance would be in addition to, rather than in 
replacement of, these temporary regulations. In the Proposed Rules 
section in this issue of the Federal Register (REG-150670-07), comments 
are requested regarding these temporary regulations and the issues 
described in this preamble.
A. Dunn Trust and Predecessor Issues
    Section 355(a)(3)(B) applies to controlled stock acquired by reason 
of any transaction during the pre-distribution period in which gain or 
loss is recognized in whole or in part. The primary types of 
transactions for which the IRS and Treasury Department are considering 
issuing additional guidance generally involve the effect of indirect 
acquisitions and the extent to which predecessor rules should apply for 
purposes of the hot stock rule. Although the IRS and Treasury 
Department are considering addressing in future guidance the issues 
arising in transactions described in this section 4.A. of the preamble, 
no inference should be drawn regarding the present application of 
section 355(a)(3)(B), including these temporary regulations, to such 
transactions.
    For example, future guidance may address whether, in a situation 
where a corporation that owns controlled stock joins the DSAG in a 
taxable transaction, the DSAG is treated as acquiring the controlled 
stock in a taxable transaction. Compare section 355(b)(3)(B); proposed 
Sec.  1.355-3(b)(1)(ii) and (b)(4)(i). Similarly, guidance may address 
the treatment of taxable acquisitions of controlled stock during the 
pre-distribution period by a corporation that subsequently joins the 
DSAG in a nontaxable transaction.
    The IRS and Treasury Department are also considering issuing 
additional guidance that treats the DSAG as making any acquisition made 
by a predecessor of a DSAG member. Compare H.R. Rep. No. 83-2543, at 38 
(1954) (Conf. Rep.) (``by reason of'' language of section 355(a)(3)(B) 
encompasses purchase of controlled stock by a corporation that is in 
control of distributing prior to ``downstairs merger'' by such 
purchaser into distributing). For this purpose, a predecessor of a 
corporation would be a corporation that transfers its assets to such 
corporation in a transaction to which section 381(a) applies. Such 
guidance would address the circumstances in which a predecessor of 
distributing (or predecessor of a DSAG member) effects an acquisition 
of controlled stock described in section 355(a)(3)(B).
    Additionally, if a DSAG acquires stock of a corporation (target) 
during the pre-distribution period in a taxable transaction and such 
target is subsequently acquired by controlled in a section 381(a) 
transaction, the earlier taxable acquisition of target stock may 
implicate section 355(a)(3)(B). A conceptually similar issue was 
addressed in Dunn Trust v. Commissioner, 86 T.C. 745 (1986), acq. 
(1998-1 CB 5 n. 4 (acquiescing in result only)), except that in Dunn 
Trust the target that was acquired by distributing was not subsequently 
acquired by controlled in a section 381(a) transaction. Instead, in 
Dunn Trust, distributing acquired stock of target in a taxable 
transaction and subsequently contributed such target stock (which stock 
could not have been distributed without violating section 355(a)(3)(B)) 
to controlled in exchange for controlled stock in a nontaxable 
transaction. The Tax Court ruled that the controlled stock was not hot 
stock under section 355(a)(3)(B). Where distributing acquires target 
stock in a taxable transaction, and the target is subsequently either 
combined with controlled in a nontaxable section 381(a) transaction or 
(as in Dunn Trust) acquired by controlled in a nontaxable stock 
acquisition, the IRS and Treasury Department believe that such 
acquisitions raise an issue as to whether target or controlled is the 
``real controlled'' for purposes of section 355(a)(3)(B).
    Identifying the ``real controlled'' might be illustrated by the 
following example. Assume that distributing owns an amount of stock in 
controlled that constitutes control within the meaning of section 
368(c) but which does not meet the requirements of section 1504(a)(2). 
Controlled, in turn, owns stock of a target subsidiary that satisfies 
the requirements of section 1504(a)(2). Distributing acquires 
additional target stock in a taxable transaction, which stock is then 
contributed to controlled in exchange for additional controlled stock 
in a transaction to which section 351(a) applies. Assume that neither 
controlled nor target joins the DSAG after either step. The question 
under section 355(a)(3)(B) is whether a target whose stock is acquired 
by the DSAG in a taxable transaction should be treated as the ``real 
controlled'', where such additional target stock is subsequently 
acquired by the actual controlled (or, in some cases, a CSAG member) in 
a nontaxable transaction. The IRS and Treasury Department are 
considering issuing guidance that would provide that a target whose 
stock is acquired by distributing in a taxable transaction may be 
treated as the ``real controlled'' for purposes of section 355(a)(3)(B) 
if, at the time of the distribution, the CSAG cannot satisfy the 
requirements of section 355(b) without taking into account an ATB 
conducted by the target at the time the DSAG acquired the stock of the 
target in the taxable transaction.

[[Page 75949]]

In other words, section 355(a)(3)(B) could be implicated as a result of 
an acquisition of target stock if the target is engaged in an ATB at 
the time the DSAG acquires the target stock in a taxable transaction, 
the target stock is then acquired by controlled (or, in some cases, a 
CSAG member) prior to the distribution, and at the time of the 
distribution of the controlled stock the CSAG is not able to satisfy 
the requirements of section 355(b) without taking into account an ATB 
that was being conducted by the target at the time the DSAG acquired 
the target stock in the taxable transaction.
B. Issuances of Controlled Stock Outside the Dunn Trust or Predecessor 
Context
    The IRS and Treasury Department are considering additional guidance 
that would generally provide that issuances of controlled stock by 
controlled to distributing in a taxable transaction do not give rise to 
hot stock. For example, such an acquisition may occur where section 
357(c) applies (see Rev. Rul. 78-442, (1978-2 CB 143) (distributing 
transfers a business to wholly-owned controlled, which assumes 
distributing's liabilities)). As noted in Rev. Rul. 78-442, the IRS and 
Treasury Department believe that section 355(b)(2)(C) was not intended 
to apply to such an acquisition of a trade or business by controlled 
from distributing under the facts of that ruling even if it is a 
taxable transaction because the acquisition was not from an ``outside 
party''. ``[F]or the same reasons, section 355(a)(3)[(B)] * * * is not 
applicable to the distribution'' of controlled stock acquired in such a 
transaction.
    The IRS and Treasury Department request comments regarding the 
extent to which issuances by controlled of controlled stock to 
distributing in taxable transactions should not give rise to hot stock, 
whether distributing must own some minimum percentage in controlled at 
the time of such issuance in order for such an acquisition to be 
excepted from section 355(a)(3)(B), and the extent to which such 
transactions are adequately addressed under section 355(a)(1)(B) 
(relating to device) and section 355(g) (relating to distributions 
involving disqualified investment corporations).
C. Redemptions of Controlled Stock
    Finally, the IRS and Treasury Department request comments regarding 
the effect of redemptions of controlled stock under section 
355(a)(3)(B). Generally, if the controlled shares distributed by 
distributing were not acquired by distributing during the pre-
distribution period, such shares cannot be hot stock. Therefore, a 
redemption by controlled of its stock from unrelated parties generally 
should not cause any portion of distributing's controlled stock to 
become hot stock. Such a rule may be distinguishable from the rule 
under section 355(b)(2)(D). See McLaulin v. Commissioner, 276 F.3d 1269 
(11th Cir. 2001) (applying section 355(b)(2)(D) when distributing 
acquired control of a subsidiary through a redemption of subsidiary 
stock), and Rev. Rul. 57-144 (1957-1 CB 123) (same).
    The distinction can be made based on the different focus of the 
provisions. Section 355(a)(3)(B) provides that controlled stock 
``acquired by the distributing corporation'' during the pre-
distribution period in a taxable transaction is hot stock, and is 
directed at the property distributed to the distributing shareholders. 
In a redemption, generally no additional shares of stock are acquired 
by distributing, and generally no additional value is distributed to 
the distributing shareholders. In contrast, section 355(b)(2)(D) 
prohibits the acquisition of ``control of a corporation.'' Control is a 
requisite status in order for distributing to distribute the stock of 
controlled to its shareholders under section 355. A redemption can 
confer this status on distributing without distributing's acquiring any 
additional shares of stock.
    However, for purposes of section 355(a)(3)(B), the IRS and Treasury 
Department believe that a redemption of controlled stock from a 
shareholder other than distributing is the equivalent of distributing's 
purchase of controlled stock from the redeemed shareholder to the 
extent distributing is the source of funds for the redemption. Further, 
the IRS and Treasury Department are studying whether there are other 
situations in which distributing's increased percentage ownership in 
controlled resulting from redemptions of controlled stock from a 
shareholder other than distributing should be treated as hot stock.

5. Request for Comments

    In the Proposed Rules section in this issue of the Federal Register 
(REG-150670-07), the IRS and Treasury Department are requesting 
comments regarding these temporary regulations, including comments on 
whether section 355(a)(3)(B) should use the same definition of taxable 
transaction as section 355(b), whether the exception for acquisitions 
from certain affiliates should be the same for both provisions, and the 
other issues described in this preamble.

Effective/Applicability Date

    These temporary regulations are generally applicable for 
distributions occurring after December 15, 2008. However, unless 
taxpayers elect otherwise, these temporary regulations do not apply to 
any distribution occurring after December 15, 2008 that is pursuant to 
a transaction which is (1) made pursuant to an agreement which was 
binding on December 15, 2008, and at all times thereafter; (2) 
described in a ruling request submitted to the IRS on or before such 
date; or (3) described on or before such date in a public announcement 
or in a filing with the Securities and Exchange Commission. 
Furthermore, taxpayers may elect to apply these temporary regulations 
retroactively to distributions to which section 4(b) of the Technical 
Corrections applies (generally to distributions occurring after May 17, 
2006).

Effect on Other Documents

    The following publications are obsolete as of the applicability of 
these temporary regulations:
    Rev. Rul. 76-54 (1976-1 CB 96).
    Rev. Rul. 65-286 (1965-2 CB 92).

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. These temporary 
regulations provide taxpayers with relief from the application of 
section 355(a)(3)(B) in certain situations. For this reason, it has 
been determined, pursuant to 5 U.S.C. 553(b)(B), that good cause exists 
for dispensing with the notice and public comment procedures and that, 
pursuant to 5 U.S.C. 553(d)(3), good cause exists to dispense with a 
delayed effective date. For the applicability of the Regulatory 
Flexibility Act refer to the Special Analyses section of the preamble 
to the cross-reference notice of proposed rulemaking published in the 
Proposed Rules section in this issue of the Federal Register. Pursuant 
to section 7805(f) of the Code, these regulations have been 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 temporary 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.

[[Page 75950]]

Availability of IRS Documents

    Documents published in the IRB cited in this preamble are available 
from 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.

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 is amended by adding an 
entry in numerical order to read in part as follows:

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


0
Par. 2. Section 1.355-0 is amended by amending the entry under Sec.  
1.355-2 to revise paragraph (g) and add paragraph (i) to read as 
follows:


Sec.  1.355-0  Outline of sections.

* * * * *


Sec.  1.355-2  Limitations.

* * * * *
    (g) [Reserved].
* * * * *
    (i) [Reserved].
0
Par. 3. Section 1.355-0T is added to read as follows:


Sec.  1.355-0T  Outline of sections (temporary).

    This section lists the major paragraphs under Sec.  1.355-2T.


Sec.  1.355-2T  Limitations (temporary).

    (a) through (f)(2) [Reserved]. For further guidance, see the 
entries for Sec.  1.355-2(a) through (f)(2) in Sec.  1.355-0.
    (g) Recently acquired controlled stock under section 355(a)(3)(B).
    (1) Other property.
    (2) Exceptions.
    (3) DSAG.
    (4) Taxable transaction.
    (5) Examples.
    (h) [Reserved]. For further guidance, see the entry for Sec.  
1.355-2(h) in Sec.  1.355-0.
    (i) Effective/applicability date.
    (1) In general.
    (2) Transition election.
    (3) Retroactive election.
    (4) Manner of election.
    (5) Prior law.
    (6) Expiration date.

0
Par. 4. 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), 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.  1.355-2T(g), 1.355-5, 1.355-6 and 1.355-7, see Sec. Sec.  
1.355-2T(i), 1.355-5(e), 1.355-6(g), and 1.355-7(k), respectively.
* * * * *

0
Par. 5. Section 1.355-2 is amended by revising paragraph (g) and adding 
paragraph (i) to read as follows:


Sec.  1.355-2  Limitations.

* * * * *
    (g) [Reserved]. For further guidance, see Sec.  1.355-2T(g).
* * * * *
    (i) [Reserved]. For further guidance, see Sec.  1.355-2T(i).
0
Par. 6. Section 1.355-2T is added to read as follows:


Sec.  1.355-2T  Limitations (temporary).

    (a) through (f)(2) [Reserved]. For further guidance, see Sec.  
1.355-2(a) through (f)(2).
    (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

[[Page 75951]]

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 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.

    (h) [Reserved]. For further guidance, see Sec.  1.355-2(h).
    (i) Effective/applicability date--(1) In general. Paragraphs (g)(1) 
through (g)(5) of this section apply to distributions occurring after 
December 15, 2008. However, except as provided in paragraph (i)(2) of 
this section, paragraphs (g)(1) through (g)(5) of this section do not 
apply to any distribution occurring after December 15, 2008 that is 
pursuant to a transaction which is--
    (i) Made pursuant to an agreement which was binding on December 15, 
2008, and at all times thereafter;
    (ii) Described in a ruling request submitted to the Internal 
Revenue Service on or before such date; or
    (iii) Described on or before such date in a public announcement or 
in a filing with the Securities and Exchange Commission.
    (2) Transition election. In the case of any distribution described 
in the second sentence of paragraph (i)(1) of this section, taxpayers 
may elect to apply all of paragraphs (g)(1) through (g)(5) of this 
section. However, neither the distributing corporation nor any person 
related to the distributing corporation within the meaning of section 
267(b) (determined immediately before or immediately after the 
distribution) may make such an election with respect to a distribution 
unless all such persons make such an election with respect to such 
distribution.
    (3) Retroactive election. In the case of any distribution occurring 
on or before December 15, 2008, taxpayers may elect to apply all of 
paragraphs (g)(1) through (g)(5) of this section to distributions to 
which section 4(b) of the Tax Technical Corrections Act of 2007, Public 
Law 110-172 (121 Stat. 2473, 2476) applies (generally applicable to 
distributions made after May 17, 2006, as provided in section 4(d) of 
that act). However, neither the distributing corporation nor any person 
related to the distributing corporation within the meaning of section 
267(b) (determined immediately before or immediately after the 
distribution) may make such an election with respect to a distribution 
unless all such persons make such an election with respect to such 
distribution.
    (4) Manner of election. Taxpayers may make any election available 
under this paragraph (i) by applying the selected rule on its original 
or amended return.
    (5) Prior law. For distributions to which paragraphs (g)(1) through 
(g)(5) of this section do not apply, see Sec.  1.355-2(g), as contained 
in 26 CFR part 1, revised as of April 1, 2008.
    (6) Expiration date. The applicability of paragraph (i) of this 
section will expire on December 15, 2011.

Steve T. Miller,
(Acting) Deputy Commissioner for Services and Enforcement.
Eric Solomon,
Assistant Secretary of the Treasury (Tax Policy).
[FR Doc. E8-29544 Filed 12-12-08; 8:45 am]
BILLING CODE 4830-01-P