Corporate Reorganizations; Distributions Under Sections 368(a)(1)(D) and 354(b)(1)(B), 67053-67059 [E9-30170]

Agencies

• Internal Revenue Service
• DEPARTMENT OF THE TREASURY

[Federal Register Volume 74, Number 242 (Friday, December 18, 2009)]
[Rules and Regulations]
[Pages 67053-67059]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: E9-30170]


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DEPARTMENT OF THE TREASURY

Internal Revenue Service

26 CFR Part 1

[TD 9475]
RIN 1545-BF83


Corporate Reorganizations; Distributions Under Sections 
368(a)(1)(D) and 354(b)(1)(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 under section 368 of 
the Internal Revenue Code (Code). The regulations provide guidance 
regarding the qualification of certain transactions as reorganizations 
described in section 368(a)(1)(D) where no stock and/or securities of 
the acquiring corporation is issued and distributed in the transaction. 
This document also contains final regulations under section 358 that 
provide guidance regarding the determination of the basis of stock or 
securities in a reorganization described in section 368(a)(1)(D) where 
no stock and/or securities of the acquiring corporation is issued and 
distributed in the transaction. This document also contains final 
regulations under section 1502 that govern reorganizations described in 
section 368(a)(1)(D) involving members of a consolidated group. These 
regulations affect corporations engaging in such transactions and their 
shareholders.

DATES: Effective Date: These regulations are effective on December 18, 
2009.
    Applicability Date: For dates of applicability, see Sec.  1.368-
2(l)(4)(i).

FOR FURTHER INFORMATION CONTACT: Bruce A. Decker, (202) 622-7790 (not a 
toll-free number).

SUPPLEMENTARY INFORMATION:

Background

    The Code provides general nonrecognition treatment for 
reorganizations specifically described in section 368(a). Section 
368(a)(1)(D) describes as a reorganization a transfer by a corporation 
(transferor corporation) of all or a part of its assets to another 
corporation (transferee corporation) if, immediately after the 
transfer, the transferor corporation or one or more of its shareholders 
(including persons who were shareholders immediately before the 
transfer), or any combination thereof, is in control of the transferee 
corporation; but only if stock or securities of the controlled 
corporation

[[Page 67054]]

are distributed in pursuance of a plan of reorganization in a 
transaction that qualifies under section 354, 355, or 356.
    Section 354(a)(1) provides that no gain or loss shall be recognized 
if stock or securities in a corporation that is a party to a 
reorganization are, in pursuance of the plan of reorganization, 
exchanged solely for stock or securities in such corporation or in 
another corporation that is a party to the reorganization. Section 
354(b)(1)(B) provides that section 354(a)(1) shall not apply to an 
exchange in pursuance of a plan of reorganization described in section 
368(a)(1)(D) unless the transferee corporation acquires substantially 
all of the assets of the transferor corporation, and the stock, 
securities, and other properties received by such transferor 
corporation, as well as the other properties of such transferor 
corporation, are distributed in pursuance of the plan of 
reorganization.
    Further, section 356 provides that if section 354 or 355 would 
apply to an exchange but for the fact that the property received in the 
exchange consists not only of property permitted by section 354 or 355 
without the recognition of gain or loss but also of other property or 
money, then the gain, if any, to the recipient shall be recognized, but 
not in excess of the amount of money and fair market value of such 
other property. Accordingly, in the case of an acquisitive transaction, 
there can only be a distribution to which section 354 or 356 applies 
where the target shareholder(s) receive at least some property 
permitted to be received by section 354.
    On December 19, 2006, the IRS and Treasury Department published a 
notice of proposed rulemaking (REG-125632-06) in the Federal Register 
(71 FR 75898) that included regulations under section 368 (the 
Temporary Regulations) providing guidance regarding whether the 
distribution requirement under sections 368(a)(1)(D) and 354(b)(1)(B) 
is satisfied if there is no actual distribution of stock and/or 
securities. The Temporary Regulations provide that the distribution 
requirement will be satisfied even though no stock and/or securities is 
actually issued in the transaction if the same persons or persons own, 
directly or indirectly, all of the stock of the transferor and 
transferee corporations in identical proportions. In such cases, the 
transferee will be deemed to issue a nominal share of stock to the 
transferor in addition to the actual consideration exchanged for the 
transferor's assets. The nominal share is then deemed distributed by 
the transferor to its shareholders and, when appropriate, further 
transferred through chains of ownership to the extent necessary to 
reflect the actual ownership of the transferor and transferee 
corporations. The IRS and Treasury Department issued the Temporary 
Regulations in response to taxpayer requests regarding whether certain 
acquisitive transactions can qualify as reorganizations described in 
section 368(a)(1)(D) where no stock of the transferee corporation is 
issued and distributed in the transaction pending a broader study of 
issues related to acquisitive section 368(a)(1)(D) reorganizations in 
general. In the notice of proposed rulemaking, the IRS and Treasury 
Department requested comments on the Temporary Regulations as well as 
on several broader issues discussed below relating to acquisitive 
section 368(a)(1)(D) reorganizations.
    On February 27, 2007, the IRS and Treasury Department published a 
clarifying amendment to the Temporary Regulations (REG-157834-06) in 
the Federal Register (72 FR 9284-9285) providing that the deemed 
issuance of the nominal share of stock of the transferee corporation in 
a transaction otherwise described in section 368(a)(1)(D) does not 
apply if the transaction otherwise qualifies as a triangular 
reorganization described in Sec.  1.358-6(b)(2) or section 368(a)(1)(G) 
by reason of section 368(a)(2)(D).
    No public hearing regarding the Temporary Regulations was requested 
or held. However, comments were received. After consideration of all of 
the comments, the Temporary Regulations are adopted as revised by this 
Treasury decision. The principal comments and changes are discussed in 
this preamble.

Explanation of Provisions

    These final regulations retain the rules of the Temporary 
Regulations, but make certain modifications to the Temporary 
Regulations in response to comments received. The following paragraphs 
describe the most significant comments received and the extent to which 
they have been incorporated into these final regulations.

Meaningless Gesture Doctrine

    Notwithstanding the requirement in section 368(a)(1)(D) that 
``stock or securities of the corporation to which the assets are 
transferred are distributed in a transaction which qualifies under 
section 354, 355, or 356'', the IRS and the courts have not required 
the actual issuance and distribution of stock and/or securities of the 
transferee corporation in circumstances where the same person or 
persons own all the stock of the transferor corporation and the 
transferee corporation. In such circumstances, the IRS and the courts 
have viewed an issuance of stock by the transferee corporation to be a 
``meaningless gesture'' not mandated by sections 368(a)(1)(D) and 
354(b). See James Armour, Inc. v. Commissioner, 43 T.C. 295, 307 
(1964); Wilson v. Commissioner, 46 T.C. 334 (1966); Rev. Rul. 70-240, 
1970-1 CB 81. In the notice of proposed rulemaking, the IRS and 
Treasury Department requested comments on whether the meaningless 
gesture doctrine is inconsistent with the distribution requirement in 
sections 368(a)(1)(D) and 354(b)(1)(B), especially in situations in 
which the cash consideration received equals the full fair market value 
of the property transferred such that there is no missing consideration 
for which the nominal share of stock deemed received and distributed 
could substitute. See Sec.  601.601(d)(2)(ii).
    Commentators noted that the doctrine is appropriate in the case 
where there is some excess in value of the assets transferred over the 
amount of cash received. In cases where the cash received is equal to 
the fair market value of the assets transferred, commentators agree 
that it is the proper approach because as a policy or administrative 
matter it is inappropriate to require a different outcome when the only 
factual difference is whether there is a nominal difference between the 
value of the assets and the cash consideration received. Commentators 
noted that deeming the distribution requirement to be satisfied in 
order to prevent an asset sale from being treated as a taxable exchange 
is not problematic enough to warrant a change from Rev. Rul. 70-240. 
Commentators have also suggested that the final regulations clarify 
that the rules apply to transactions regardless of whether the sum paid 
for the transferor's assets is exactly equal to their value.
    The IRS and Treasury Department agree with the comments received 
regarding the meaningless gesture doctrine. Accordingly, these final 
regulations retain the rules of the Temporary Regulations which are 
based in part on the meaningless gesture doctrine. In addition, 
consistent with the IRS and Treasury Department's view of such 
transactions and in response to comments, the final regulations provide 
that if no consideration is received, or the value of the consideration 
received in the transaction is less than the fair market value of the 
transferor corporation's assets, the transferee corporation will be 
treated as issuing stock with a value equal to the excess

[[Page 67055]]

of the fair market value of the transferor corporation's assets over 
the value of the consideration actually received in the transaction. 
The final regulations further provide that if the value of the 
consideration received in the transaction is equal to the fair market 
value of the transferor corporation's assets, the transferee 
corporation will be deemed to issue a nominal share (discussed in this 
preamble) of stock to the transferor corporation in addition to the 
actual consideration exchanged for the transferor corporation's assets.

Issuance of Nominal Share

    As described in this preamble, if the same person or persons own, 
directly or indirectly, all of the stock of the transferor and 
transferee corporations in identical proportions in a transaction 
otherwise described in section 368(a)(1)(D), the transferee will be 
deemed to issue a nominal share of stock to the transferor in addition 
to the actual consideration exchanged for the transferor's assets. The 
nominal share is then deemed distributed by the transferor to its 
shareholders and, when appropriate, further transferred through the 
chains of ownership to the extent necessary to reflect the actual 
ownership of the transferor and transferee corporations.
    Commentators have asked for clarification as to whether the deemed 
issuance of a nominal share has any tax significance beyond satisfying 
the distribution requirement of section 354(b)(1)(B). Commentators have 
suggested that instead of deeming a stock issuance in a purported 
section 368(a)(1)(D) reorganization, the final regulations should 
simply state that such transactions are deemed to be transactions 
described in section 356. Furthermore, commentators believe that if the 
transferor corporation owns stock of the transferee corporation before 
the reorganization and the transferor corporation distributes such 
transferee corporation stock (and no other stock) to its shareholders, 
the transaction would qualify under section 354(b)(1)(B) and therefore 
would qualify under section 368(a)(1)(D). Commentators believe the IRS 
and Treasury Department have the authority to reach that result without 
deeming a nominal share to be issued as this approach has been adopted 
elsewhere. See Sec.  1.368-2(d)(4) (a subsidiary liquidation not 
subject to section 332 can qualify as a section 368(a)(1)(C) 
reorganization by effectively treating old and cold subsidiary stock 
that the parent holds as exchanged for hypothetical parent voting stock 
issued in exchange for the subsidiary's assets). Commentators have 
suggested that if the final regulations retain the nominal share 
concept, then the final regulations should clarify that the nominal 
share has no significance other than to meet the distribution 
requirement of section 354(b)(1)(B).
    The IRS and Treasury Department have carefully considered the 
comments regarding the nominal share concept and believe that it is 
preferable to an approach that simply deems the statutory requirements 
satisfied because the nominal share also provides a useful mechanism 
with respect to stock basis consequences to the exchanging shareholder. 
As noted above, following the deemed issuance of the nominal share, it 
is deemed distributed by the transferor to its shareholders and, when 
appropriate, further transferred through the chains of ownership to the 
extent necessary to reflect the actual ownership of the transferor and 
transferee corporation (the final regulations provide similar treatment 
where, in a transaction involving no consideration or partial 
consideration, the transferee corporation is deemed to issue stock). 
Beyond satisfying section 354(b)(1)(B), the IRS and Treasury Department 
believe that the nominal share should be treated as nonrecognition 
property under section 358(a), and thus substituted basis property. 
Following basis adjustments (for example, under section 358 or Sec.  
1.1502-32), the nominal share preserves remaining basis, if any, and 
facilitates future stock gain or loss recognition by the appropriate 
shareholder.
    With respect to the comment regarding previously owned stock of the 
transferee by the transferor qualifying under section 354(b)(1)(B), 
this raises issues that are beyond the scope of this regulation project 
and therefore are not addressed in this document. Accordingly, the 
final regulations retain the rule that if the same persons or persons 
own, directly or indirectly, all of the stock of the transferor and 
transferee corporations in identical proportions, the transferee will 
be deemed to issue a nominal share of stock to the transferor in 
addition to the actual consideration exchanged for the transferor's 
assets.

Basis Allocation

    While the IRS and Treasury Department believe that all of the 
normal tax consequences occur from the issuance of a nominal share in a 
transaction described in these final regulations, commentators have 
noted that such consequences are unclear with respect to the allocation 
of basis in the shares of the stock or securities surrendered when the 
consideration received in the transaction consists solely of cash. 
While commentators believe that the basis in the shares of the stock or 
securities surrendered should be preserved in the basis of the stock of 
the transferee, the mechanics of achieving this result are unclear.
    The regulations under Sec.  1.358-2(a)(2)(iii) address how basis is 
determined in the case of a reorganization in which no property is 
received or property (including property permitted by section 354 to be 
received without the recognition of gain or ``other property'' or 
money) with a fair market value less than that of the stock or 
securities surrendered is received in the transaction. The regulations 
treat the acquiring corporation as issuing an amount of stock equal to 
the fair market value of the stock surrendered, less any amount of 
consideration actually received by the exchanging shareholder in the 
form of stock, securities, other property, or money. The basis of that 
deemed issued stock is determined by reference to the basis of the 
shares surrendered in the reorganization, and adjusted as provided in 
the regulations. The shareholder's stock in the acquiring corporation 
is then treated as being recapitalized. In the recapitalization, the 
shareholder is treated as surrendering all of its shares of the 
acquiring corporation, including those shares owned immediately prior 
to the reorganization and those shares the shareholder is deemed to 
receive, in exchange for the shares that the shareholder actually holds 
immediately after the reorganization. The basis of the shares that the 
shareholder actually owns is determined under the rules that would have 
applied had the recapitalization actually occurred with respect to the 
shareholder's actual shares and the shares the shareholder is deemed to 
have received. However, these rules do not literally apply to a 
transaction involving solely other property or money because the rules 
address situations in which a shareholder of the target corporation 
receives no property or property with a fair market value less than 
that of the stock or securities the shareholder surrendered in the 
transaction.
    The IRS and Treasury Department agree with the commentators that 
the basis in the shares of the stock surrendered should be preserved in 
the basis of the stock of the transferee in a transaction described in 
these final regulations. The IRS and Treasury Department also agree 
that current law does not adequately address the manner in which the 
basis in the shares of the stock or securities surrendered is

[[Page 67056]]

preserved in the basis of the stock of the transferee. Accordingly, the 
regulations under Sec.  1.358-2(a)(2)(iii) are amended to provide that 
in the case of a reorganization in which the property received consists 
solely of non-qualifying property equal to the value of the assets 
transferred (as well as a nominal share described in these final 
regulations), the shareholder or security holder may designate the 
share of stock of the transferee to which the basis, if any, of the 
stock or securities surrendered will attach. The IRS and Treasury 
Department believe this approach is the most consistent with current 
law regarding basis determination as a similar result would occur under 
Sec.  1.358-2 if stock was actually issued in the transaction. 
Nonetheless, as part of its broader study of basis issues, the IRS and 
Treasury Department will re-examine these regulations and the rules may 
change upon completion of this broader study.

Application of Final Regulations to Consolidated Groups

    In the notice to proposed rulemaking, the IRS and Treasury 
Department requested comments on whether the Temporary Regulations 
should apply when the parties to the reorganization are members of a 
consolidated group. Commentators have stated that the Temporary 
Regulations should apply because there is no reason to distinguish a 
consolidated group member's reorganization treatment from that of a 
member of a nonconsolidated affiliated group. Commentators have 
suggested that the consolidated return regulations should be 
coordinated with the Temporary Regulations. Specifically, Sec.  1.1502-
13(f)(3) provides that, in the case of an acquisitive intercompany 
reorganization involving the receipt of money or other property (boot), 
boot is taken into account immediately after the reorganization in a 
separate transaction. See Sec.  1.1502-13(f)(7), Example 3 (an 
intercompany reorganization with boot is treated as if the acquirer had 
issued only its stock in the reorganization, and the deemed shares were 
then redeemed by the acquirer in exchange for the boot). The effect of 
this rule is to remove the boot from section 356 (dividend within gain 
treatment) and treat it as received in a redemption which is in turn 
taxed as a section 301 distribution.
    Commentators have suggested that the nominal share concept under 
the Temporary Regulations is consistent with the deemed shares in 
Example 3 under Sec.  1.1502-13(f)(7) as the nominal share fiction 
deems a transaction to qualify as a section 368 reorganization, and the 
shares deemed issued under the Sec.  1.1502-13(f)(3) fiction determine 
the consequences of the reorganization. Commentators have requested 
that an example be added to Sec.  1.1502-13 to illustrate the 
interaction of the Temporary Regulations and Sec.  1.1502-13(f)(3). 
Specifically, commentators have requested that the example clarify that 
the nominal share does not exist for any purpose other than to satisfy 
the distribution requirement of section 354(b)(1)(B). Therefore, Sec.  
1.1502-13(f)(3) should apply in the same way to the post-reorganization 
deemed redemption of stock in exchange for the boot actually received 
(that is, as if the distributee did not own the nominal share). 
Commentators believe that any remaining stock basis or ELA in the 
deemed shares under the Sec.  1.1502-13(f)(3) fiction should shift to 
the member(s) that actually own stock in the transferee corporation 
under the principles of Sec.  1.302-2(c).
    As discussed in this preamble, the IRS and Treasury Department 
believe that the nominal share has significance beyond satisfaction of 
the distribution requirement of section 354(b)(1)(B), most notably for 
purposes of determining stock basis consequences to the appropriate 
shareholder. In an all cash sale of assets between members of a 
consolidated group, the IRS and Treasury Department believe that giving 
significance to the nominal share for purposes beyond the distribution 
requirement is consistent with the fundamental premise underlying the 
intercompany transaction deferral system which is to preserve the 
location of gain or loss within a consolidated group. Therefore, if an 
all cash transaction described in these final regulations occurs 
between members of a consolidated group, the selling member (S) will be 
treated as receiving the nominal share and additional stock of the 
buying member (B) under Sec.  1.1502-13(f)(3), which it will distribute 
to its shareholder member (M) in liquidation. Immediately after the 
sale, the B stock (with the exception of the nominal share which is 
still held by M) received by M is treated as redeemed, and the 
redemption is treated under section 302(d) as a distribution to which 
section 301 applies. M's basis in the B stock will be reduced under 
Sec.  1.1502-32(b)(3)(v). Under the rules of Sec.  1.302-2(c), any 
remaining basis will attach to the nominal share. If applicable, the 
nominal share will be further transferred through chains of ownership 
to the extent necessary to reflect the actual ownership of B. An 
example has been added to Sec.  1.1502-13 to illustrate the interaction 
of these final regulations and the consolidated return regulations.

Additional Comments Received

    The IRS and Treasury Department also requested comments on the 
extent, if any, to which the continuity of interest requirement should 
apply to a reorganization described in section 368(a)(1)(D) as well as 
the continued vitality of various liquidation-reincorporation 
authorities after the enactment of the Tax Reform Act of 1986, Public 
Law 99-514 (100 Stat. 2085 (1986)). Comments were received on these 
issues. The IRS and Treasury Department continue to study these issues 
as part of a broad study of reorganizations under section 368(a)(1)(D).

Additional Comments Requested

    The IRS and Treasury Department request comments on the application 
of the final regulations to reorganizations involving foreign 
corporations or shareholders, including comments regarding: (1) Whether 
any section 1248 amount attributable to the stock of the transferor 
corporation can be preserved in the nominal share deemed issued by the 
transferee corporation; (2) the manner in which earnings and profits 
(E&P) are (or should be) taken into account for purposes of section 902 
when an exchanging shareholder recognizes gain under section 356(a) 
that is treated as a dividend under section 356(a)(2) from the E&P of 
the transferor and transferee corporations (including whether the E&P 
of the corporation is combined for this purpose or whether an ordering 
rule applies); (3) whether and how section 902 should apply when an 
exchanging shareholder does not actually own stock in the transferee 
corporation but the exchanging shareholder recognizes gain under 
section 356(a) that is treated as a dividend from the E&P of the 
transferee corporation (including whether a limitation similar to that 
of section 304(b)(5) is appropriate in such cases); (4) whether and 
how, under section 959, an exchanging shareholder should be able to 
access previously taxed E&P of a foreign transferor and/or transferee 
corporation before any non-previously taxed E&P of either corporation; 
and (5) whether and how section 897 applies if the transferor 
corporation is a United States real property holding corporation with 
at least one foreign shareholder.

Special Analyses

    It has been determined that this Treasury decision is not a 
significant regulatory action as defined in Executive Order 12866. 
Therefore, a

[[Page 67057]]

regulatory assessment is not required. It is hereby certified that 
these regulations do not have a significant economic impact on a 
substantial number of small entities. This certification is based on 
the fact that these regulations primarily affect affiliated groups of 
corporations that have elected to file consolidated returns, which tend 
to be larger businesses, and, moreover, that any burden on taxpayers is 
minimal. 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 Internal Revenue Code, the notice of 
proposed rulemaking preceding these regulations was submitted to the 
Chief Counsel for Advocacy of the Small Business Administration for 
comment on its impact on small business.

Drafting Information

    The principal author of these regulations is Bruce A. Decker, 
Office of Associate Chief Counsel (Corporate). However, other personnel 
from the IRS and the 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

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

PART 1--INCOME TAXES

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

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

0
Par. 2. Section 1.358-2 is amended by adding a sentence at the end of 
paragraph (a)(2)(iii) to read as follows:


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

    (a) * * *
    (2) * * *
    (iii) * * * If a shareholder or security holder surrenders a share 
of stock or a security in a transaction under the terms of section 354 
(or so much of section 356 as relates to section 354) in which such 
shareholder or security holder is deemed to receive a nominal share 
described in Sec.  1.368-2(l), such shareholder may, after adjusting 
the basis of the nominal share in accordance with the rules of this 
section and Sec.  1.358-1, designate the share of stock of the issuing 
corporation to which the basis, if any, of the nominal share will 
attach.
* * * * *

0
Par. 3. Section 1.368-2 is amended by revising paragraph (l) to read as 
follows:


Sec.  1.368-2  Definition of terms.

* * * * *
    (l) Certain transactions treated as reorganizations described in 
section 368(a)(1)(D)--(1) General rule. In order to qualify as a 
reorganization under section 368(a)(1)(D), a corporation (transferor 
corporation) must transfer all or part of its assets to another 
corporation (transferee corporation) and immediately after the transfer 
the transferor corporation, or one or more of its shareholders 
(including persons who were shareholders immediately before the 
transfer), or any combination thereof, must be in control of the 
transferee corporation; but only if, in pursuance of the plan, stock or 
securities of the transferee are distributed in a transaction which 
qualifies under section 354, 355, or 356.
    (2) Distribution requirement--(i) In general. For purposes of 
paragraph (l)(1) of this section, a transaction otherwise described in 
section 368(a)(1)(D) will be treated as satisfying the requirements of 
sections 368(a)(1)(D) and 354(b)(1)(B) notwithstanding that there is no 
actual issuance of stock and/or securities of the transferee 
corporation if the same person or persons own, directly or indirectly, 
all of the stock of the transferor and transferee corporations in 
identical proportions. In cases where no consideration is received or 
the value of the consideration received in the transaction is less than 
the fair market value of the transferor corporation's assets, the 
transferee corporation will be treated as issuing stock with a value 
equal to the excess of the fair market value of the transferor 
corporation's assets over the value of the consideration actually 
received in the transaction. In cases where the value of the 
consideration received in the transaction is equal to the fair market 
value of the transferor corporation's assets, the transferee 
corporation will be deemed to issue a nominal share of stock to the 
transferor corporation in addition to the actual consideration 
exchanged for the transferor corporation's assets. The nominal share of 
stock in the transferee corporation will then be deemed distributed by 
the transferor corporation to the shareholders of the transferor 
corporation, as part of the exchange for the stock of such 
shareholders. Where appropriate, the nominal share will be further 
transferred through chains of ownership to the extent necessary to 
reflect the actual ownership of the transferor and transferee 
corporations. Similar treatment to that of the preceding two sentences 
shall apply where the transferee corporation is treated as issuing 
stock with a value equal to the excess of the fair market value of the 
transferor corporation's assets over the value of the consideration 
actually received in the transaction.
    (ii) Attribution. For purposes of paragraph (l)(2)(i) of this 
section, ownership of stock will be determined by applying the 
principles of section 318(a)(2) without regard to the 50 percent 
limitation in section 318(a)(2)(C). In addition, an individual and all 
members of his family described in section 318(a)(1) shall be treated 
as one individual.
    (iii) De minimis variations in ownership and certain stock not 
taken into account. For purposes of paragraph (l)(2)(i) of this 
section, the same person or persons will be treated as owning, directly 
or indirectly, all of the stock of the transferor and transferee 
corporations in identical proportions notwithstanding the fact that 
there is a de minimis variation in shareholder identity or 
proportionality of ownership. Additionally, for purposes of paragraph 
(l)(2)(i) of this section, stock described in section 1504(a)(4) is not 
taken into account.
    (iv) Exception. Paragraph (l)(2) of this section does not apply to 
a transaction otherwise described in Sec.  1.358-6(b)(2) or section 
368(a)(1)(G) by reason of section 368(a)(2)(D).
    (3) Examples. The following examples illustrate the principles of 
paragraph (l) of this section. For purposes of these examples, each of 
A, B, C, and D is an individual, T is the acquired corporation, S is 
the acquiring corporation, P is the parent corporation, and each of S1, 
S2, S3, and S4 is a direct or indirect subsidiary of P. Further, all of 
the requirements of section 368(a)(1)(D) other than the requirement 
that stock or securities be distributed in a transaction to which 
section 354 or 356 applies are satisfied. The examples are as follows:

    Example 1. A owns all the stock of T and S. The T stock has a 
fair market value of $100x. T sells all of its assets to S in 
exchange for $100x of cash and immediately liquidates. Because there 
is complete shareholder identity and proportionality of ownership in 
T and S, under paragraph (l)(2)(i) of this section, the requirements 
of sections 368(a)(1)(D) and 354(b)(1)(B) are treated as satisfied 
notwithstanding the fact that no S stock is issued. Pursuant to 
paragraph (l)(2)(i) of this section, S will be deemed to issue a 
nominal share of S stock to T in addition to the $100x of cash 
actually exchanged for the T assets, and T will be deemed to 
distribute all such consideration to A. The transaction qualifies as 
a

[[Page 67058]]

reorganization described in section 368(a)(1)(D).
    Example 2. The facts are the same as in Example 1 except that C, 
A's son, owns all of the stock of S. Under paragraph (l)(2)(ii) of 
this section, A and C are treated as one individual. Accordingly, 
there is complete shareholder identity and proportionality of 
ownership in T and S. Therefore, under paragraph (l)(2)(i) of this 
section, the requirements of sections 368(a)(1)(D) and 354(b)(1)(B) 
are treated as satisfied notwithstanding the fact that no S stock is 
issued. Pursuant to paragraph (l)(2)(i) of this section, S will be 
deemed to issue a nominal share of S stock to T in addition to the 
$100x of cash actually exchanged for the T assets, and T will be 
deemed to distribute all such consideration to A. A will be deemed 
to transfer the nominal share of S stock to C. The transaction 
qualifies as a reorganization described in section 368(a)(1)(D).
    Example 3.  P owns all of the stock of S1 and S2. S1 owns all of 
the stock of S3, which owns all of the stock of T. S2 owns all of 
the stock of S4, which owns all of the stock of S. The T stock has a 
fair market value of $70x. T sells all of its assets to S in 
exchange for $70x of cash and immediately liquidates. Under 
paragraph (l)(2)(ii) of this section, there is indirect, complete 
shareholder identity and proportionality of ownership in T and S. 
Accordingly, the requirements of sections 368(a)(1)(D) and 
354(b)(1)(B) are treated as satisfied notwithstanding the fact that 
no S stock is issued. Pursuant to paragraph (l)(2)(i) of this 
section, S will be deemed to issue a nominal share of S stock to T 
in addition to the $70x of cash actually exchanged for the T assets, 
and T will be deemed to distribute all such consideration to S3. S3 
will be deemed to distribute the nominal share of S stock to S1, 
which, in turn, will be deemed to distribute the nominal share of S 
stock to P. P will be deemed to transfer the nominal share of S 
stock to S2, which, in turn, will be deemed to transfer such share 
of S stock to S4. The transaction qualifies as a reorganization 
described in section 368(a)(1)(D).
    Example 4. A, B, and C own 34%, 33%, and 33%, respectively, of 
the stock of T. The T stock has a fair market value of $100x. A, B, 
and C each own 33% of the stock of S. D owns the remaining 1% of the 
stock of S. T sells all of its assets to S in exchange for $100x of 
cash and immediately liquidates. For purposes of determining whether 
the distribution requirement of sections 368(a)(1)(D) and 
354(b)(1)(B) is met, under paragraph (l)(2)(iii) of this section, 
D's ownership of a de minimis amount of stock of S is disregarded 
and the transaction is treated as if there is complete shareholder 
identity and proportionality of ownership in T and S. Because there 
is complete shareholder identity and proportionality of ownership in 
T and S, under paragraph (l)(2)(i) of this section, the requirements 
of sections 368(a)(1)(D) and 354(b)(1)(B) are treated as satisfied 
notwithstanding the fact that no S stock is issued. Pursuant to 
paragraph (l)(2)(i) of this section, S will be deemed to issue a 
nominal share of S stock to T in addition to the $100x of cash 
actually exchanged for the T assets, T will be deemed to distribute 
all such consideration to A, B, and C, and the nominal S stock will 
be deemed transferred among the S shareholders to the extent 
necessary to reflect their actual ownership of S. The transaction 
qualifies as a reorganization described in section 368(a)(1)(D).
    Example 5. The facts are the same as in Example 4 except that A, 
B, and C own 34%, 33%, and 33%, respectively, of the common stock of 
T and S. D owns preferred stock in S described in section 
1504(a)(4). For purposes of determining whether the distribution 
requirement of sections 368(a)(1)(D) and 354(b)(1)(B) is met, under 
paragraph (l)(2)(iii) of this section, D's ownership of S stock 
described in section 1504(a)(4) is ignored and the transaction is 
treated as if there is complete shareholder identity and 
proportionality of ownership in T and S. Because there is complete 
shareholder identity and proportionality of ownership in T and S, 
under paragraph (l)(2)(i) of this section, the requirements of 
sections 368(a)(1)(D) and 354(b)(1)(B) are treated as satisfied 
notwithstanding the fact that no S stock is issued. Pursuant to 
paragraph (l)(2)(i) of this section, S will be deemed to issue a 
nominal share of S stock to T in addition to the $100x of cash 
actually exchanged for the T assets, and T will be deemed to 
distribute all such consideration to A, B, and C. The transaction 
qualifies as a reorganization described in section 368(a)(1)(D).
    Example 6. A and B each own 50% of the stock of T. The T stock 
has a fair market value of $100x. B and C own 90% and 10%, 
respectively, of the stock of S. T sells all of its assets to S in 
exchange for $100x of cash and immediately liquidates. Because 
complete shareholder identity and proportionality of ownership in T 
and S does not exist, paragraph (l)(2)(i) of this section does not 
apply. The requirements of sections 368(a)(1)(D) and 354(b)(1)(B) 
are not satisfied, and the transaction does not qualify as a 
reorganization described in section 368(a)(1)(D).

    (4) Effective/applicability date. (i) In general. This section 
applies to transactions occurring on or after December 18, 2009. For 
rules regarding transactions occurring before December 18, 2009, see 
section 1.368-2T(l) as contained in 26 CFR part 1.
    (ii) Transitional rule. A taxpayer may apply the provisions of 
these regulations to transactions occurring before December 18, 2009. 
However, the transferor corporation, the transferee corporation, any 
direct or indirect transferee of transferred basis property from either 
of the foregoing, and any shareholder of the transferor or transferee 
corporation may not apply the provisions of these regulations unless 
all such taxpayers apply the provisions of the regulations.


Sec.  1.368-2T  [Removed]

0
Par. 4. Section 1.368-2T is removed.

0
Par. 5. Section 1.1502-13 is amended by:

0
1. Revising the heading and entries for Sec.  1.1502-13(f)(7) in 
paragraph (a)(6)(ii).

0
2. Redesignating Examples 4, 5, 6, 7, and 8 as Examples 5, 6, 7, 8, and 
9 respectively and adding a new Example 4 to paragraph (f)(7)(i).
    The revision and addition reads as follows:


Sec.  1.1502-13  Intercompany transactions.

    (a) * * *
    (6) * * *
    (ii) * * *

Stock of members. (Sec.  1.1502-13(f)(7))

    Example 1. Dividend exclusion and property distribution.
    Example 2. Excess loss accounts.
    Example 3. Intercompany reorganizations.
    Example 4. All cash intercompany reorganization under section 
368(a)(1)(D).
    Example 5. Stock redemptions and distributions.
    Example 6. Intercompany stock sale followed by section 332 
liquidation.
    Example 7. Intercompany stock sale followed by section 355 
distribution.
* * * * *
    (f) * * *
    (7) * * *
    (i) * * *
    Example 4. All cash intercompany reorganization under section 
368(a)(1)(D). (a) Facts. P owns all of the stock of M and B. M owns 
all of the stock of S with a basis of $25. On January 1 of Year 2, 
the fair market value of S's assets and its stock is $100, and S 
sells all of its assets to B for $100 cash and liquidates. The 
transaction qualifies as a reorganization described in section 
368(a)(1)(D). Pursuant to Sec.  1.368-2(l), B will be deemed to 
issue a nominal share of B stock to S in addition to the $100 of 
cash actually exchanged for the S assets, and S will be deemed to 
distribute all of the consideration to M. M will be deemed to 
distribute the nominal share of B stock to P.
    (b) Treatment as a section 301 distribution. The sale of S's 
assets to B is a transaction to which paragraph (f)(3) of this 
section applies. In addition to the nominal share issued by B to S 
under Sec.  1.368-2(l), S is treated as receiving additional B stock 
with a fair market value of $100 (in lieu of the $100) and, under 
section 358, a basis of $25 which S distributes to M in liquidation. 
Immediately after the sale, the B stock (with the exception of the 
nominal share which is still held by M) received by M is treated as 
redeemed for $100, and the redemption is treated under section 
302(d) as a distribution to which section 301 applies. M's basis of 
$25 in the B stock is reduced under Sec.  1.1502-32(b)(3)(v), 
resulting in an excess loss account of $75 in the nominal share. 
(See Sec.  1.302-2(c)). M's deemed distribution of the nominal share 
of B stock to P under Sec.  1.368-2(l) will result in M generating 
an

[[Page 67059]]

intercompany gain under section 311(b) of $75, to be subsequently 
taken into account under the matching and acceleration rules.
* * * * *

    Approved: December 14, 2009.
Linda E. Stiff,
Deputy Commissioner for Services and Enforcement.
Michael Mundaca,
Assistant Secretary of the Treasury (Tax Policy).
[FR Doc. E9-30170 Filed 12-17-09; 8:45 am]
BILLING CODE 4830-01-P