Federal Register / Vol. 65, No. 17 / Wednesday, January 26, 2000 / Proposed Rules 4203

properly marked containers. However, the

third party processor fails to mark the new

container after processing and repacking the

article, as required under 19 U.S.C. 1304. In

this example, the article is excepted from

individual marking but each new container

in which the article is repacked is required

to be marked with the country of origin, until

the article reaches the ultimate purchaser, in

this case, the retail customer. As a result of

the importer’s failure to comply with the

certification requirements of this section the

importer may be subject to the assessment of

marking duties and penalties as provided

under paragraph (e) of this section.

10. It is proposed to amend

redesignated § 134.34 as follows:

a. Revise the heading;

b. Redesignate current paragraphs (b),

(c), (d), (e) and (f), respectively, as new

paragraphs (c), (d), (e), (f) and (g);

c. Add a new paragraph (b); and

d. Add an example after redesignated

paragraph (f).

The revisions and additions will read

as follows:

§ 134.34 Repacked marked articles.

* * * * *

(b) Repacker. A ‘‘repacker’’ means a

person, including the importer, who

repackages an article subject to these

requirements, and includes a person

who processes such article in the U.S.

but, as a result of such processing is not

the ultimate purchaser of the article

under 19 CFR 134.1(d). An article may

be repacked more than once before

reaching the ultimate purchaser.

* * * * *

(f) Duties and penalties.

* * * * *

Example. The importer enters articles from

China which are individually marked with

their country of origin. He sells the articles

in their bulk packaging to a customer in the

U.S. who processes the articles and also

repacks them in bulk for sale to a third party.

The third party repacks them into blister

packs for sale to retail customers. The U.S.

processor is not the ultimate purchaser under

19 CFR 134.1(d). However, the blister

packages obscure the country of origin

marking on the article. Although it is clear

that the articles will be repackaged for retail

sale, the importer fails to follow the

certification procedures of this section and

does not notify its immediate customer of the

marking requirements. In this example,

having reasonable knowledge of the

subsequent repacking of the articles into

retail containers after release from Customs

custody imposes an obligation upon the

importer to notify its U.S. customer of the

marking requirements and to provide the

required certification to the port director.

Since the importer has failed to comply with

the certification requirements of this

provision, and the retail packages obscure

country of origin marking, the importer may

be subject to duties and penalties as provided

under paragraph (f) of this section.

* * * * *

§ 134.47 [Removed]

11. It is proposed that § 134.47 (19

CFR 134.47) be removed.

Raymond W. Kelly,

Commissioner of Customs.

Approved: January 19, 2000.

Dennis M. O’Connell,

Acting Deputy Assistant Secretary of the

Treasury.

[FR Doc. 00–1682 Filed 1–25–00; 8:45 am]

BILLING CODE 4820–02–P

DEPARTMENT OF THE TREASURY

Internal Revenue Service

26 CFR Part 1

[REG–105089–99]

RIN 1545–AX38

Guidance Under Section 356 Relating

to the Treatment of Nonqualified

Preferred Stock and Other Preferred

Stock in Certain Exchanges and

Distributions

AGENCY: Internal Revenue Service (IRS),

Treasury.

ACTION: Notice of proposed rulemaking

and notice of public hearing.

SUMMARY: This document contains

proposed regulations providing

guidance relating to nonqualified

preferred stock. The proposed

regulations address the effective date of

the definition of nonqualified preferred

stock and the treatment of nonqualified

preferred stock and similar preferred

stock received by shareholders in

certain reorganizations and

distributions. This document also

provides notice of a public hearing on

these proposed regulations.

DATES: Written or electronic comments

and requests to speak (with outlines of

oral comments) at a public hearing

scheduled for 10 a.m., May 31, 2000,

must be received by May 10, 2000.

ADDRESSES: Send submissions to:

CC:DOM:CORP:R (REG–105089–99),

Room 5226, Internal Revenue Service,

POB 7604, Ben Franklin Station,

Washington, DC 20044. Submissions

may be hand delivered Monday through

Friday between the hours of 8 a.m. and

5 p.m. to: CC:DOM:CORP:R (REG–

105089–99), Courier’s Desk, Internal

Revenue Service, 1111 Constitution

Avenue, NW., Washington, DC.

Alternatively, taxpayers may submit

comments electronically via the Internet

by selecting the ‘‘Tax Regs’’ option on

the IRS Home Page or by submitting

comments directly to the IRS Internet

site at http://www.irs.ustreas.gov/

taxlregs/regslist.html. The public

hearing will be held in the NYU

Classroom, Room 2615, Internal

Revenue Building, 1111 Constitution

Avenue, NW., Washington, DC.

FOR FURTHER INFORMATION CONTACT:

Concerning the proposed regulations,

Richard E. Coss, (202) 622–7790;

concerning submissions of comments,

the hearing, and/or to be placed on the

building access list to attend the

hearing, LaNita Van Dyke, (202) 622–

7180 (not toll-free numbers).

SUPPLEMENTARY INFORMATION:

Background

This document contains proposed

amendments to the Income Tax

Regulations (26 CFR part 1) under

sections 354, 355, 356, and 1036 of the

Internal Revenue Code (the Code).

Section 1014 of the Taxpayer Relief Act

of 1997 (TRA of 1997), Public Law 105–

34, enacted on August 5, 1997, amended

sections 351, 354, 355, 356, and 1036 of

the Code. As amended, these sections,

in general, provide that nonqualified

preferred stock (as defined in section

351(g)(2)) (NQPS) received in an

exchange or distribution will not be

treated as stock or securities but,

instead, will be treated as ‘‘other

property’’ or ‘‘boot.’’ As a result, the

receipt of NQPS in a transaction

occurring after the NQPS provisions are

effective will, unless a specified

exception applies, result in gain (or, in

some instances, loss) recognition.

Section 351(g)(4) provides authority to

issue regulations to carry out the

purposes of these provisions.

Section 351(g)(2)(A) defines NQPS as

preferred stock if (1) the holder has the

right to require the issuer or a related

person to redeem or purchase the stock,

(2) the issuer or a related person is

required to redeem or purchase the

stock, (3) the issuer or a related person

has the right to redeem or purchase the

stock and, as of the issue date, it is more

likely than not that such right will be

exercised, or (4) the dividend rate on the

stock varies in whole or in part (directly

or indirectly) with reference to interest

rates, commodity prices, or other similar

indices. Factors (1), (2), and (3) above

will cause an instrument to be NQPS

only if the right or obligation may be

exercised within 20 years of the date the

instrument is issued and such right or

obligation is not subject to a

contingency which, as of the issue date,

makes remote the likelihood of the

redemption or purchase.

These rights or obligations do not

cause preferred stock to be NQPS in

certain circumstances described in

section 351(g)(2)(C). In one such

4204 Federal Register / Vol. 65, No. 17 / Wednesday, January 26, 2000 / Proposed Rules

exception, contained in section

351(g)(2)(C)(i)(II), a redemption or

purchase right shall not cause stock to

be NQPS if the stock containing the

right is transferred in connection with

the performance of services for the

issuer or a related person (and

represents reasonable compensation),

and the right may be exercised only

upon the holder’s separation from

service.

The NQPS provisions also provide

certain exceptions to the treatment of

NQPS as boot. Under sections

354(a)(2)(C), 355(a)(3)(D), and 356(e)(2),

NQPS is treated as stock, and not other

property, in cases where the NQPS is

received in exchange for, or in a

distribution with respect to, NQPS. As

a result, the receipt of NQPS in

exchange for NQPS will not result in

gain or loss recognition.

Under prior law, preferred stock

generally did not constitute boot in a

reorganization or in a distribution under

section 355 of the Code. The legislative

history of the NQPS provisions

indicates that Congress was concerned

about nonrecognition transactions in

which a secure preferred stock

instrument is received in exchange for

common stock or riskier preferred stock.

The committee reports state that

‘‘[c]ertain preferred stocks have been

widely used in corporate transactions to

afford taxpayers non-recognition

treatment, even though the taxpayers

may receive relatively secure

instruments in exchange for relatively

risky investments,’’ and that ‘‘[t]he

Committee believes that when such

preferred stock instruments are received

in certain transactions, it is appropriate

to view such instruments as taxable

consideration, since the investor has

often obtained a more secure form of

investment.’’ H.R. Rep. No. 148, 105th

Cong., 1st Sess. 472 (1997); S. Rep. 33,

105th Cong., 1st Sess. (1997).

The NQPS provisions apply to

transactions after June 8, 1997, but will

not apply to any transaction (1) made

pursuant to a written agreement which

was binding on such date and at all

times thereafter, (2) described in a

ruling request submitted to the IRS on

or before such date, or (3) described in

a public announcement or filing with

the Securities and Exchange

Commission on or before such date.

Section 1014(f) of TRA of 1997.

A temporary regulation published as

T.D. 8753 in the Federal Register on

January 6, 1998, provides that,

notwithstanding contemporaneously

issued final regulations treating certain

rights to acquire stock as securities that

can be received tax-free in

reorganizations and section 355

distributions, a right to acquire NQPS

received in exchange for stock other

than NQPS (or for a right to acquire

stock other than NQPS) will not be

treated as a security, and that NQPS

received in exchange for stock other

than NQPS (or for a right to acquire

stock other than NQPS) will not be

treated as stock or a security. The

temporary regulation added § 1.356–6T,

and applies to NQPS (or a right to

acquire such stock) received in

connection with a transaction occurring

on or after March 9, 1998 (other than

transactions described in section

1014(f)(2) of TRA of 1997).

Explanation of Provisions

The proposed regulations address

three technical issues relating to the

question of whether certain preferred

stock instruments qualify as NQPS.

The first issue addressed by the

proposed regulations is whether stock

described in section 351(g)(2) that was

issued in a transaction on or before June

8, 1997, qualifies as NQPS (even though

the receipt of such stock would not have

been boot because the transaction in

which it was received occurred prior to

the NQPS provisions’ effective date).

Although the NQPS provisions

generally are effective with respect to

transactions occurring after June 8,

1997, neither the effective date

provisions of section 1014(f) of TRA of

1997 nor the legislative history of the

NQPS provisions addresses this issue.

The proposed regulations provide that

stock described in section 351(g)(2) is

NQPS regardless of the date on which

the stock is issued. The IRS and

Treasury believe that this represents the

proper interpretation of the NQPS

provisions; a contrary interpretation

would give rise to results that are

inconsistent with other NQPS

provisions and their underlying policy.

For example, assume that corporation

(T) issues preferred stock described in

section 351(g)(2) to shareholder (X) in

1996, and that X surrenders the T stock

and receives NQPS of acquiring

corporation (P) in a reorganization

occurring after June 8, 1997 (when the

NQPS provisions are effective). If the T

preferred stock received in 1996 is not

NQPS, X will recognize gain (if any) on

the exchange. This result is

unwarranted, because X is not receiving

a more secure type of investment for a

relatively risky type of investment, and

exchanges of NQPS for NQPS are

otherwise governed by the

nonrecognition rules of sections 354,

355, and 356.

The second issue addressed by the

proposed regulations is the treatment of

NQPS received in a reorganization in

exchange for (or in a distribution with

respect to) preferred stock that is not

NQPS solely because, at the time the

original stock was issued, a redemption

or purchase right was not exercisable

until after a 20-year period beginning on

the issue date, or a redemption or

purchase right was exercisable within a

20-year period but was subject to a

contingency which made remote the

likelihood of the redemption or

purchase, or, in the case of an issuer’s

right to redeem or purchase stock

described in section 351(g)(2)(A)(iii),

was unlikely to be exercised within a

20-year period beginning on the issue

date (or because of any combination of

these reasons). To illustrate, assume that

after June 8, 1997, T issues preferred

stock to X that permits the holder to

require T to redeem the stock on

demand, but not before the stock is held

for 22 years. Assume that seven years

later, the T stock is exchanged in a

reorganization for P preferred stock with

substantially identical terms that

permits the holder to require P to

redeem the stock after 15 years.

Technically, this transaction could be

viewed as a taxable exchange because X

is receiving P stock that meets the

definition of NQPS in exchange for T

stock that is not NQPS (QPS). However,

the IRS and Treasury believe that

nonrecognition treatment is appropriate

because the P stock represents a

continuation of the original investment

in the T stock.

The proposed regulations provide a

rule that treats the P stock received in

such transactions as QPS if the P stock

is substantially identical to the T

preferred stock surrendered (or the T

stock on which a distribution is made).

The substantially identical requirement

is necessary to ensure that this rule does

not permit the NQPS provisions to be

circumvented through exchanges of QPS

for more secure NQPS. The P stock is

considered to be substantially identical

to the T stock if two conditions are met.

The first condition is that the P stock

does not contain any terms which, in

relation to the terms of the T stock,

decrease the period in which a

redemption or purchase right will be

exercised, increase the likelihood that

such a right will be exercised, or

accelerate the timing of the returns from

the stock instrument (including the

receipt of dividends or other

distributions). The second condition is

that, as a result of the receipt of P stock

in the transaction, the exercise of the

right or obligation does not become

more likely than not to occur within a

20-year period beginning on the issue

date of the T stock. To illustrate the two

conditions, if the P stock contains a

Federal Register / Vol. 65, No. 17 / Wednesday, January 26, 2000 / Proposed Rules 4205

term that permits the stock to be

redeemed before the date on which the

T stock could be redeemed, or if, at the

time of the transaction, the T stock is

not more likely than not to be redeemed

within a 20-year period beginning on

the issue date of the T stock but the P

stock is more likely than not to be

redeemed within a 20-year period

beginning on the issue date of the T

stock, the P stock is not substantially

identical to the T stock.

Under this rule, the P stock received

will continue to be treated as QPS in

subsequent transactions, and similar

principles will apply to those

transactions. For example, if the P stock

is later exchanged in a reorganization

for substantially identical stock of

another acquiring corporation, the

acquiring corporation stock will also be

treated as QPS. However, if the P stock

is later exchanged for stock described in

section 351(g)(2) that is not substantially

identical, the receipt of the stock will be

treated as boot.

The third issue addressed by the

proposed regulations is how to interpret

the provision that exempts from the

definition of NQPS certain preferred

stock containing a purchase or

redemption right that may only be

exercised on the holder’s separation

from service (compensation stock). To

be exempted from the definition of

NQPS under this provision, stock must

be ‘‘transferred in connection with the

performance of services’’ and must

represent ‘‘reasonable compensation.’’ A

commentator has questioned how these

requirements apply in the context of a

reorganization or distribution. The

concern is that, when an employee of T

receives P preferred stock in a

reorganization in exchange for T stock

of equal value, the P stock received

could be considered transferred in

exchange for stock (rather than for

services), or could be considered not to

represent reasonable compensation

(because the P stock received in the

equal value exchange represents no

additional compensation to the

employee). The legislative history of the

NQPS provisions does not address these

ambiguities.

The IRS and Treasury believe that the

exemption for compensation stock is

intended to apply in situations where an

employee previously received

compensation stock and then surrenders

that stock in a reorganization in

exchange for new compensation stock

containing a similar purchase or

redemption right that can only be

exercised upon separation from service.

The proposed regulations provide a rule

that treats the P preferred stock received

in such transactions as satisfying the

‘‘transferred in connection with the

performance of services’’ and the

‘‘reasonable compensation’’

requirements if the T stock surrendered

(or the T stock on which a distribution

is made) was originally transferred to

the T employee in connection with the

performance of services and represented

reasonable compensation at the time of

the transfer. This rule applies regardless

of whether the T stock is common or

preferred stock. No inference is

intended regarding the meaning of the

phrases ‘‘transferred in connection with

the performance of services’’ and

‘‘reasonable compensation’’ for

purposes other than the exemption from

the definition of NQPS in section

351(g)(2)(C)(i)(II).

The proposed regulations also provide

that the principles of the rules described

above apply to transactions involving

rights to acquire NQPS that are subject

to § 1.356–6T.

Proposed Effective Date

The proposed regulations are

proposed to be effective for transactions

on the date that final regulations are

published in the Federal Register.

Notwithstanding the prospective

effective date of the proposed

regulations, the IRS and Treasury

believe that the regulations prescribe the

proper treatment of the transactions

they address, and the IRS generally will

not challenge return positions

consistent with the regulations.

However, a transaction involving rights

to acquire NQPS that occurs before the

effective date of § 1.356–6T will be

treated in accordance with the law

governing rights to acquire stock in

effect at that time.

Special Analyses

It has been determined that this notice

of proposed rulemaking is not a

significant regulatory action as defined

in Executive Order 12866. Therefore, a

regulatory assessment is not required. It

has also been determined that section

553(b) of the Administrative Procedures

Act (5 U.S.C. chapter 5) does not apply

to these regulations and, because the

regulations do not impose a collection

of information on small entities, the

Regulatory Flexibility Act (5 U.S.C.

chapter 6) does not apply. Pursuant to

section 7805(f) of the Internal Revenue

Code, this notice of proposed

rulemaking will be submitted to the

Chief Counsel for Advocacy of the Small

Business Administration for comment

on its impact on small business.

Comments and Public Hearing

Before these proposed regulations are

adopted as final regulations,

consideration will be given to any

written comments (preferably a signed

original and eight (8) copies, if written)

that are submitted timely (in the manner

described in the ADDRESSES portion of

this preamble) to the IRS. The IRS and

Treasury specifically request comments

on the clarity of the proposed

regulations and how the regulations

may be made easier to understand. All

comments will be available for public

inspection and copying.

A public hearing has been scheduled

for May 31, 2000, beginning at 10 a.m.,

in the NYU Classroom, Room 2615,

Internal Revenue Building, 1111

Constitution Avenue, NW., Washington,

DC. Due to building security

procedures, visitors must enter at the

10th Street entrance, located between

Constitution and Pennsylvania

Avenues, NW. In addition, all visitors

must present photo identification to

enter the building. Because of access

restrictions, visitors will not be

admitted beyond the immediate

entrance area more than 15 minutes

before the hearing starts. For

information about having your name

placed on the hearing access list to

attend the hearing, see the FOR FURTHER

INFORMATION CONTACT section of this

preamble.

The rules of 26 CFR 601.601(a)(3)

apply to the hearing. Persons who wish

to present oral comments at the hearing

must request to speak, and submit

written comments and an outline of the

topics to be discussed and the time to

be devoted to each topic (signed original

and eight (8) copies) by May 10, 2000.

A period of 10 minutes will be allotted

to each person for making comments.

An agenda showing the scheduling of

the speakers will be prepared after the

deadline for receiving outlines has

passed. Copies of the agenda will be

available free of charge at the hearing.

Drafting Information

The principal author of these

proposed regulations is Richard E. Coss,

Office of Assistant Chief Counsel

(Corporate). However, other personnel

from the IRS and Treasury participated

in their development.

List of Subjects in 26 CFR Part 1

Income taxes, Reporting and

recordkeeping requirements.

Proposed Amendments to the

Regulations

Accordingly, 26 CFR part 1 is

proposed to be amended as follows:

PART 1—INCOME TAXES

Paragraph 1. The authority citation for

part 1 is amended by adding the

4206 Federal Register / Vol. 65, No. 17 / Wednesday, January 26, 2000 / Proposed Rules

following entries in numerical order to

read in part as follows:

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

Section 1.354–1 also issued under 26

U.S.C. 351(g)(4).

Section 1.355–1 also issued under 26

U.S.C. 351(g)(4). * * *

Section 1.356–7 also issued under 26

U.S.C. 351(g)(4). * * *

Section 1.1036–1 also issued under 26

U.S.C. 351(g)(4). * * *

Par. 2. Section 1.354–1 is amended by

adding paragraph (f) as follows:

§ 1.354–1 Exchanges of stock and

securities in certain reorganizations.

* * * * *

(f) Nonqualified preferred stock. See

§ 1.356–7(a) and (b) for the treatment of

nonqualified preferred stock (as defined

in section 351(g)(2)) received in certain

exchanges for nonqualified preferred

stock or preferred stock. See § 1.356–

7(c) for the treatment of preferred stock

received in certain exchanges for

common or preferred stock described in

section 351(g)(2)(C)(i)(II).

Par. 3. Section 1.355–1 is amended by

adding paragraph (d) as follows:

§ 1.355–1 Distributions of stock and

securities of a controlled corporation.

* * * * *

(d) Nonqualified preferred stock. See

§ 1.356–7(a) and (b) for the treatment of

nonqualified preferred stock (as defined

in section 351(g)(2)) received in certain

exchanges for (or in certain distributions

with respect to) nonqualified preferred

stock or preferred stock. See § 1.356–

7(c) for the treatment of the receipt of

preferred stock in certain exchanges for

(or in certain distributions with respect

to) common or preferred stock described

in section 351(g)(2)(C)(i)(II).

Par. 4. Section 1.356–7 is added to

read as follows:

§ 1.356–7 Rules for treatment of

nonqualified preferred stock and other

preferred stock received in certain

transactions.

(a) Stock issued prior to effective date.

Stock described in section 351(g)(2) is

nonqualified preferred stock (NQPS)

regardless of the date on which the

stock is issued. However, sections

351(g), 354(a)(2)(C), 355(a)(3)(D), 356(e),

and 1036(b) do not apply to any

transaction occurring prior to June 9,

1997, or to any transaction occurring

after June 8, 1997, that is described in

section 1014(f)(2) of the Taxpayer Relief

Act of 1997, Public Law 105–34, 111

Stat. 788, 921.

(b) Receipt of preferred stock in

exchange for (or distribution on)

substantially identical preferred stock

(1) General rule. For purposes of

sections 354(a)(2)(C)(i), 355(a)(3)(D), and

356(e)(2), preferred stock is not NQPS,

even though it is described in section

351(g)(2), if it is received in exchange

for (or in a distribution with respect to)

preferred stock (the original preferred

stock) that is not NQPS (QPS),

provided—

(i) The original preferred stock is QPS

solely because, on its issue date, a right

or obligation described in clause (i), (ii),

or (iii) of section 351(g)(2)(A) was not

exercisable until after a 20-year period

beginning on the issue date, the right or

obligation was exercisable within the

20-year period beginning on the issue

date but was subject to a contingency

which made remote the likelihood of

the redemption or purchase, or the

issuer’s (or a related party’s) right to

redeem or purchase the stock was not

more likely than not to be exercised

within a 20-year period beginning on

the issue date, or because of any

combination of these reasons; and

(ii) the stock received is substantially

identical to the original preferred stock.

(2) Substantially identical. The stock

received is substantially identical to the

original preferred stock if—

(i) the stock received does not contain

any term or terms which, in relation to

any term or terms of the original

preferred stock, decrease the period in

which a right or obligation described in

clause (i), (ii), or (iii) of section

351(g)(2)(A) may be exercised, increase

the likelihood that such a right or

obligation may be exercised, or

accelerate the timing of the returns from

the stock instrument, including the

timing of actual or deemed dividends or

other distributions received on the

stock; and

(B) as a result of the exchange or

distribution, exercise of the right or

obligation does not become more likely

than not to occur within a 20-year

period beginning on the issue date of

the original preferred stock.

(3) Treatment of stock received. The

stock received will continue to be

treated as QPS in subsequent

transactions involving such stock, and

the principles of this paragraph (b)

apply to such transactions as though the

stock received is the original preferred

stock issued on the same date as the

original preferred stock.

(c) Stock transferred for services. For

purposes of sections 354(a)(2)(C)(i),

355(a)(3)(D), and 356(e)(2), preferred

stock containing a right or obligation

described in clause (i), (ii) or (iii) of

section 351(g)(2)(A) that is exercisable

only upon the holder’s separation from

service from the issuer or a related

person (as described in section

351(g)(3)(B)) will be treated as

transferred in connection with the

performance of services (and

representing reasonable compensation)

within the meaning of section

351(g)(2)(C)(i)(II), if such preferred stock

is received in exchange for (or in a

distribution with respect to) existing

stock containing a similar right or

obligation (exercisable only upon

separation from service) and the existing

stock was transferred in connection

with the performance of services for the

issuer or a related person (and

represented reasonable compensation

when transferred). In applying the rules

relating to NQPS, the preferred stock

received will continue to be treated as

transferred in connection with the

performance of services (and

representing reasonable compensation)

in subsequent transactions involving

such stock, and the principles of this

paragraph (c) apply to such transactions.

(d) Rights to acquire stock. For

purposes of § 1.356–6T, the principles

of paragraphs (a), (b), and (c) of this

section apply.

(e) Examples. The following examples

illustrate paragraphs (a), (b), and (c) of

this section. For purposes of the

examples in this paragraph (e), T and P

are corporations, A is a shareholder of

T, and, except for in Example 1, A

surrenders and receives (in addition to

the stock exchanged in the examples)

common stock in the reorganizations

described.

Example 1. In 1995, A transfers property to

T and receives T preferred stock that is

described in section 351(g)(2) in a transaction

under section 351. In 2002, pursuant to a

reorganization under section 368(a)(1)(B), A

surrenders the T preferred stock in exchange

for P NQPS. Under paragraph (a) of this

section, the T preferred stock issued to A in

1995 is NQPS. However, because section

351(g) does not apply to transactions

occurring before June 9, 1997, the T NQPS

was not ‘‘other property’’ within the meaning

of section 351(b) when issued in 1995. Under

sections 354(a)(2)(C) and 356(e)(2), the P

NQPS received by A in 2002 is not ‘‘other

property’’ within the meaning of section

356(a)(1)(B) because it is received in

exchange for NQPS.

Example 2. T issues QPS to A on January

1, 2000 that is not NQPS solely because the

holder cannot require T to redeem the stock

until January 1, 2022. In 2007, pursuant to a

reorganization under section 368(a)(1)(A) in

which T merges into P, A surrenders the T

preferred stock in exchange for P preferred

stock with terms that are identical to the

terms of the T preferred stock, including the

term that the holder cannot require the

redemption of the stock until January 1,

2022. Because the P stock and the T stock

have identical terms, and because the

redemption did not become more likely than

Federal Register / Vol. 65, No. 17 / Wednesday, January 26, 2000 / Proposed Rules 4207

not to occur within the 20-year period that

begins on January 1, 2000 (which is the issue

date of the T preferred stock) as a result of

the exchange, under paragraph (b) of this

section, the P preferred stock received by A

is treated as QPS. Thus, the P preferred stock

received is not ‘‘other property’’ within the

meaning of section 356(a)(1)(B).

Example 3. The facts are the same as in

Example 2, except that, in addition, in 2010,

pursuant to a recapitalization of P under

section 368(a)(1)(E), A exchanges the P

preferred stock above for P NQPS that

permits the holder to require P to redeem the

stock in 2020. Under paragraph (b) of this

section, the P preferred stock surrendered by

A is treated as QPS. Because the P preferred

stock received by A in the recapitalization is

not substantially identical to the P preferred

stock surrendered, the P preferred stock

received by A is not treated as QPS. Thus,

the P preferred stock received is ‘‘other

property’’ within the meaning of section

356(a)(1)(B).

Example 4. T issues preferred stock to A

on January 1, 2000 that permits the holder to

require T to redeem the stock on January 1,

2018, or at any time thereafter, but which is

not NQPS solely because, as of the issue date,

the holder’s right to redeem is subject to a

contingency which makes remote the

likelihood of redemption on or before

January 1, 2020. In 2007, pursuant to a

reorganization under section 368(a)(1)(A) in

which T merges into P, A surrenders the T

preferred stock in exchange for P preferred

stock with terms that are identical to the

terms of the T preferred stock. Immediately

before the exchange, the contingency to

which the holder’s right to cause redemption

of the T stock is subject makes remote the

likelihood of redemption before January 1,

2020, but the P stock, although subject to the

same contingency, is more likely than not to

be redeemed before January 1, 2020. Because,

as a result of the exchange of T stock for P

stock, the exercise of the redemption right

became more likely than not to occur within

the 20-year period beginning on the issue

date of the T preferred stock, the P preferred

stock received by A is not substantially

identical to the T stock surrendered, and is

not treated as QPS. Thus, the P preferred

stock received is ‘‘other property’’ within the

meaning of section 356(a)(1)(B).

Example 5. The facts are the same as in

Example 4, except that, immediately before

the merger of T into P in 2007, the

contingency to which the holder’s right to

cause redemption of the T stock is subject

makes it more likely than not that the T stock

will be redeemed before January 1, 2020.

Because exercise of the redemption right did

not become more likely than not to occur

within the 20-year period beginning on the

issue date of the T preferred stock as a result

of the exchange, the P preferred stock

received by A is substantially identical to the

T stock surrendered, and is treated as QPS.

Thus, the P preferred stock received is not

‘‘other property’’ within the meaning of

section 356(a)(1)(B).

Example 6. A is an employee of T. In

connection with A’s performance of services

for T, T transfers to A in 2000 an amount of

T common stock that represents reasonable

compensation. The T common stock contains

a term granting A the right to require T to

redeem the common stock, but only upon A’s

separation from service from T. In 2005,

pursuant to a reorganization under section

368(a)(1)(A) in which T merges into P, A

receives, in exchange for A’s T common

stock, P preferred stock granting a similar

redemption right upon A’s separation from

P’s service. Under paragraph (c) of this

section, the P preferred stock received by A

is treated as transferred in connection with

the performance of services (and representing

reasonable compensation) within the

meaning of section 351(g)(2)(C)(i)(II). Thus,

the P preferred stock received by A is QPS.

(f) Effective dates. This section

applies to transactions occurring on or

after the date these regulations are

published as final regulations in the

Federal Register.

Par. 5. Section 1.1036–1 is amended

by adding paragraph (d) as follows:

§ 1.1036–1 Stock for stock of the same

corporation.

* * * * *

(d) Nonqualified preferred stock. See

§ 1.356–7(a) for the applicability of the

definition of nonqualified preferred

stock in section 351(g)(2) for stock

issued prior to June 9, 1997, and for

stock issued in transactions occurring

after June 8, 1997, that are described in

section 1014(f) of the Taxpayer Relief

Act of 1997, Public Law 105–34, 111

Stat. 788,921.

Robert E. Wenzel,

Deputy Commissioner of Internal Revenue.

[FR Doc. 00–1529 Filed 1–21–00 11:59 am]

BILLING CODE 4380–01–U

ENVIRONMENTAL PROTECTION

AGENCY

40 CFR Part 52

[IN 87–1b; FRL–6527–9]

Approval of Post-1996 Rate of

Progress Plan: Indiana

AGENCY: Environmental Protection

Agency (EPA).

ACTION: Proposed rule.

SUMMARY: We are proposing to approve

Indiana’s Post-1996 Rate of Progress

Plan for Lake and Porter Counties,

Indiana, submitted on December 17,

1997, and January 22, 1998. The Plan

identifies volatile organic compound

control measures and documents

projections that those measures provide

3% per year (9% total) emission

reductions in Lake and Porter Counties

between 1996 and 1999. Our approval

means that EPA finds the State Plan

meets Clean Air Act (Act) requirements.

In the final rules section of this Federal

Register, the EPA is approving the

State’s request as a direct final rule

without prior proposal because EPA

views this action as noncontroversial

and anticipates no adverse comments. A

detailed rationale for approving the

State’s request is set forth in the direct

final rule. The direct final rule will

become effective without further notice

unless the Agency receives relevant

adverse written comment on this action.

Should the Agency receive such

comment, it will publish a final rule

informing the public that the direct final

rule will not take effect and such public

comment received will be addressed in

a subsequent final rule based on this

proposed rule. If no adverse written

comments are received, the direct final

rule will take effect on the date stated

in that document and no further activity

will be taken on this proposed rule. EPA

does not plan to institute a second

comment period on this action. Any

parties interested in commenting on this

action should do so at this time.

DATES: Written comments must be

received on or before February 25, 2000.

ADDRESSES: Written comments should

be mailed to: J. Elmer Bortzer, Chief,

Regulation Development Section, Air

Programs Branch (AR–18J),

Environmental Protection Agency,

Region 5, 77 West Jackson Boulevard,

Chicago, Illinois 60604.

Copies of the State submittal are

available for inspection at: Regulation

Development Section, Air Programs

Branch (AR–18J), Environmental

Protection Agency, Region 5, 77 West

Jackson Boulevard, Chicago, Illinois

60604.

FOR FURTHER INFORMATION CONTACT:

Ryan Bahr, Environmental Engineer,

Regulation Development Section, Air

Programs Branch (AR–18J),

Environmental Protection Agency,

Region 5, 77 West Jackson Boulevard,

Chicago, Illinois 60604, (312) 353–4366.

SUPPLEMENTARY INFORMATION: For

additional information see the direct

final rule published in the final rules

section of this Federal Register.

Dated: January 6, 2000.

Francis X. Lyons,

Regional Administrator, Region 5.

[FR Doc. 00–1559 Filed 1–25–00; 8:45 am]

BILLING CODE 6560–50–P