Federal Register / Vol. 72, No. 53 / Tuesday, March 20, 2007 / Proposed Rules 13055 

PART 416—SUPPLEMENTAL 

SECURITY INCOME FOR THE AGED, 

BLIND, AND DISABLED 

Subpart I—[Amended] 

3. The authority citation for subpart I 

of part 416 continues to read as follows: 

Authority: Secs. 221(m), 702(a)(5), 1611, 

1614, 1619, 1631(a), (c), (d)(1), and (p), and 

1633 of the Social Security Act (42 U.S.C. 

421(m), 902(a)(5), 1382, 1382c, 1382h, 

1383(a), (c), (d)(1), and (p), and 1383b); secs. 

4(c) and 5, 6(c)–(e), 14(a), and 15, Pub. L. 98–

460, 98 Stat. 1794, 1801, 1802, and 1808 (42 

U.S.C. 421 note, 423 note, 1382h note). 

4. Revise paragraph (e)(1) of 

§ 416.919s to read as follows: 

§ 416.919s Authorizing and monitoring the 

consultative examination. 

* * * * * 

(e) * * * 

(1) Any consultative examination 

provider with an estimated annual 

billing to the disability programs we 

administer of at least $150,000; or 

* * * * * 

[FR Doc. E7–4958 Filed 3–19–07; 8:45 am] 

BILLING CODE 4191–02–P 

DEPARTMENT OF THE TREASURY 

Internal Revenue Service 

26 CFR Part 1 

[REG–113365–04] 

RIN 1545–BD19 

Escrow Accounts, Trusts, and Other 

Funds Used During Deferred 

Exchanges of Like-Kind Property 

AGENCY: Internal Revenue Service (IRS), 

Treasury. 

ACTION: Proposed Rulemaking; Revised 

Initial Regulatory Flexibility Analysis. 

SUMMARY: This document contains a 

revised initial regulatory flexibility 

analysis relating to proposed regulations 

under section 468B of the Internal 

Revenue Code on the taxation and 

reporting of income earned on escrow 

accounts, trusts, and other funds used 

during deferred exchanges of like-kind 

property, and proposed regulations 

under section 7872 regarding belowmarket loans to facilitators of these 

exchanges. The proposed regulations 

affect taxpayers that engage in deferred 

like-kind exchanges and escrow holders, 

trustees, qualified intermediaries, and 

others that hold funds during deferred 

like-kind exchanges. 

DATES: Written or electronic comments 

must be received by May 4, 2007. 

ADDRESSES: Send submissions to 

CC:PA:LPD:PR (REG–113365–04), room 

5203, 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 4 p.m. 

to: CC:PA:LPD:PR (REG–113365–04), 

courier’s desk, Internal Revenue 

Service, 1111 Constitution Avenue, 

NW., Washington, DC. Alternatively, 

taxpayers may submit electronic 

comments via the Federal eRulemaking 

Portal at http://www.regulations.gov 

(IRS–REG–113365–04). 

FOR FURTHER INFORMATION CONTACT: 

Concerning the revised initial regulatory 

flexibility analysis and the proposed 

regulations under section 468B, Jeffrey 

Rodrick, (202) 622–4930; concerning the 

proposed regulations under section 

7872, David Silber, (202) 622–3930; 

concerning submission of comments, 

Kelly Banks, (202) 622–3628 (not tollfree numbers). 

SUPPLEMENTARY INFORMATION: On 

February 7, 2006, a partial withdrawal 

of notice of proposed rulemaking, notice 

of proposed rulemaking, and notice of 

public hearing was published in the 

Federal Register (71 FR 6231). The 

initial regulatory flexibility analysis 

included in that notice of proposed 

rulemaking concluded that the number 

of transactions involving small 

businesses that will be affected and the 

full extent of the economic impact on 

small businesses could not be precisely 

determined and requested additional 

comments. This notice revises the initial 

regulatory flexibility analysis included 

in that notice of proposed rulemaking in 

response to comments provided in 

writing and at a public hearing. These 

comments asserted that the analysis did 

not adequately define the industry, 

determine the number of small 

businesses affected, describe the 

economic impact of the proposed 

regulations on small businesses, or 

discuss alternatives to the proposed 

rules that were considered and the bases 

for conclusions reached. The IRS and 

the Department of the Treasury have 

worked closely with the Small Business 

Administration’s (SBA) Office of 

Advocacy (Advocacy) to obtain 

additional information from the affected 

industry to identify and quantify the 

small businesses affected and to 

determine the likely economic impact of 

the proposed regulations on small 

businesses. In a letter dated August 3, 

2006, the president of the leading 

industry association for qualified 

intermediaries (QI), wrote that the 

association ‘‘believes we have or can 

develop information that would be 

helpful in this [impact-study] effort,’’

and volunteered to provide this 

information to the IRS. The industry 

association surveyed its members based 

on questions developed by the IRS and 

the Department of the Treasury, and 

submitted a summary of the survey 

responses for consideration. The 

association, which according to its Web 

site has over 300 member companies 

(not all of which are QIs), received 

approximately 130 responses. Seventyone respondents indicated they engage 

in the QI business exclusively, which 

represents 22 percent of the estimated 

number of 325 full-time QIs in the 

industry (as discussed in this notice, not 

all of which are small businesses). The 

summary of the survey responses 

submitted did not address a substantial 

number of the issues important to 

evaluating the effect of the proposed 

regulations on small business. The 

summary of the survey responses is 

available at http://www.IRS.gov/regs. 

This notice seeks additional comments 

and reiterates questions that will assist 

in assessing the economic impact of the 

proposed regulations on small 

businesses in the QI industry and in 

considering reasonable alternatives. The 

survey information provided is 

discussed in this revised initial 

regulatory flexibility analysis and will 

be considered further in the 

development of final regulations. 

Revised Initial Regulatory Flexibility 

Analysis 

Reasons for Action and Succinct 

Statement of the Objectives of, and 

Legal Basis for, the Proposed Rule 

The proposed regulations are issued 

under the authority of section 7805, 

section 468B(g) (which provides that 

nothing in any provision of law shall be 

construed as providing that an escrow 

account, settlement fund, or similar 

fund is not subject to current income tax 

and that the Secretary shall prescribe 

regulations providing for the taxation of 

such accounts or funds whether as a 

grantor trust or otherwise), and section 

7872. 

Section 1.468B–6 of the Income Tax 

Regulations was included in proposed 

regulations issued in 1999 under section 

468B(g) (the 1999 proposed regulations), 

and provided rules for the current 

taxation of income of a qualified escrow 

account or qualified trust used in a 

section 1031 deferred exchange of likekind property. The 1999 proposed 

regulations included a facts and 

circumstances test to determine whether 

the taxpayer (the transferor or exchangor 

of the property), the QI, or a transferee 

is the owner of the assets in a qualified 


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13056 Federal Register / Vol. 72, No. 53 / Tuesday, March 20, 2007 / Proposed Rules 

escrow account or qualified trust and 

must take into account all items of 

income, deduction, and credit 

(including capital gains and losses) of 

the account or trust. The 1999 proposed 

regulations further provided that, if a QI 

or transferee is the owner of the assets 

transferred, the transaction may be 

characterized as a below-market loan 

from the taxpayer to the owner to which 

section 7872 may apply. Under this 

proposed rule, if a QI or transferee is the 

owner of the assets, the transaction is a 

loan to which section 7872 generally 

applies if the loan is below-market. 

Comments received on the 1999 

proposed regulations reflected differing 

interpretations of the 1999 proposed 

regulations and disagreement on the 

proper rules for taxing these 

transactions. Some commentators 

interpreted the 1999 proposed 

regulations as allowing a QI to ‘‘own’’

the funds held in connection with the 

deferred like-kind exchange and never 

characterize the arrangement between 

the taxpayer and the QI as a loan. 

Rules based on a facts-andcircumstances test are inherently 

difficult for taxpayers to apply and for 

the IRS to administer, and are subject to 

inconsistent application. Therefore, the 

2006 proposed regulations eliminate the 

facts and circumstances test and 

propose specific rules that determine 

whether the income of an escrow 

account, trust, or fund used in a 

deferred like-kind exchange is taxed to 

the taxpayer or to an exchange 

facilitator, which is a QI, transferee, or 

other party that holds the exchange 

funds. These rules are intended to 

provide greater certainty for taxpayers, 

enhance administrability, and ensure 

consistent treatment of taxpayers. 

Description and Estimate of the Number 

of Small Businesses to Which the 

Proposed Regulations Will Apply 

The 2006 proposed regulations affect 

exchange facilitators that hold exchange 

funds for taxpayers engaging in deferred 

exchanges of like-kind property. 

Exchange facilitators may be large or 

small businesses (including individuals 

operating as sole proprietors). For this 

purpose, the SBA size standards set 

forth at 13 CFR 121.201 for North 

American Industry Classification 

System (NAICS) code 531390 (other 

activities related to real estate), define a 

business with annual gross receipts of 

up to $2 million as a small business. 

There is no NAICS code associated 

specifically with exchange facilitators or 

QIs. Although like-kind exchanges are 

not limited to real estate transactions, 70 

percent of the respondents to the 

industry survey indicated that they use 

NAICS code 531390. Therefore, 

notwithstanding comments criticizing 

the use of NAICS code 531390 for 

purposes of determining the applicable 

size standard with respect to the 2006 

proposed regulations, after consultation 

with Advocacy, the IRS and the 

Department of the Treasury have 

determined that NAICS code 531390 is 

appropriate for this industry. 

Accordingly, the applicable size 

standard for determining what 

constitutes a small business with 

respect to the 2006 proposed regulations 

is $2 million in annual gross receipts, 

the SBA’s definition of a small business 

for NAICS code 531390. 

The IRS and the Department of the 

Treasury estimate that there are 

approximately 325 businesses 

(primarily QIs) that are full-time 

exchange facilitators. This estimate is 

based on information originally 

provided by the industry association in 

connection with the development of the 

2006 proposed regulations. The recent 

industry survey did not provide any 

additional information regarding this 

number. Seventy-one of 121 (58.7 

percent) respondents to the survey 

indicated that they are engaged 

exclusively in the QI business, although 

it is unclear how many of these are 

small businesses. Although 84 percent 

of respondents reported having annual 

gross revenues (fees plus net retained 

interest, if any) from the QI business of 

$1.5 million or less (the previous size 

standard for NAICS code 531390) for the 

most recent year, it is unclear how many 

of this number are exclusively in the QI 

business. The survey also indicated that 

almost 90 percent of respondents have 

10 or fewer employees (including 

owners active in the business), and 

nearly 70 percent have fewer than 5 

employees. An estimate of the 

percentage of the QI industry that 

consists of small businesses is difficult 

to make based on the available 

information. The summary of the survey 

responses did not correlate information 

on annual gross revenues reported with 

information on the number of 

respondents engaged exclusively in the 

QI business. Nonetheless, it appears that 

a significant portion of the QI industry 

consists of small businesses under the 

SBA’s size standard. Accordingly, the 

IRS and the Department of the Treasury 

continue to seek information regarding 

the number of small businesses engaged 

in the QI industry. Specific comments 

are requested from QIs engaged 

exclusively in that business indicating 

whether their annual gross receipts are 

$2 million or less, or more than $2 

million. 

Searches for information through the 

Department of Commerce and the SBA 

disclosed no data collected or 

maintained on QIs or exchange 

facilitators as an industry. 

Description of Compliance 

Requirements and Estimate of the 

Classes of Small Businesses That Will 

Be Affected by the Compliance 

Requirements 

Under the 2006 proposed regulations, 

exchange funds are treated as loaned by 

the taxpayer to the exchange facilitator 

unless all of the income earned is paid 

to the taxpayer. If the exchange funds 

are treated as loaned to the exchange 

facilitator, interest generally is imputed 

to the taxpayer under section 7872 

unless the exchange facilitator pays 

sufficient interest. If a loan between the 

taxpayer and the exchange facilitator 

does not provide for sufficient interest 

and the loan is not otherwise exempt 

from section 7872, interest income is 

imputed to the taxpayer at the 

applicable Federal rate (AFR) (or the 

difference between the rate paid and the 

AFR). Therefore, exchange facilitators 

must keep records of the amount of 

income paid to the taxpayer and may be 

required to report the income on Form 

1099. 

Under section 7872 and the 2006 

proposed regulations, if the exchange 

funds are treated as loaned from the 

taxpayer to the QI and the loan is a 

below-market loan, income is deemed 

transferred to the exchange facilitator as 

compensation and retransferred to the 

taxpayer as interest. The taxpayer’s 

imputed interest income is not offset by 

a deduction for the taxpayer’s imputed 

payment to the exchange facilitator 

because compensation paid to the 

exchange facilitator is a cost of 

acquiring the replacement property that 

must be capitalized and added to the 

property’s basis. The exchange 

facilitator has income from the imputed 

compensation and an offsetting 

deduction for the interest deemed paid 

to the taxpayer. 

Seventy percent of respondents to the 

industry survey reported that they 

engage in at least 100 exchange 

transactions a year. According to 

information provided by the industry 

association from an earlier survey of its 

members, over 92 percent of the small 

business respondents currently pay to 

the taxpayer at least 20 percent of the 

income earned on exchange funds, 

including accounts that commingle the 

exchange funds of multiple taxpayers. 

The IRS and the Department of the 

Treasury request additional comments 

providing more specific information to 

clarify these results. The information 


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Federal Register / Vol. 72, No. 53 / Tuesday, March 20, 2007 / Proposed Rules 13057 

available suggests that an overwhelming 

majority of small businesses affected by 

the 2006 proposed regulations currently 

maintain records of the amount of 

income paid to the taxpayer and report 

the payments on Form 1099. Therefore, 

the IRS and the Department of the 

Treasury estimate that for most small 

businesses the 2006 proposed 

regulations should not increase 

significantly the compliance burden 

associated with keeping records and 

reporting income paid to the taxpayer. 

Nonetheless, commentators have 

stated generally that complying with the 

2006 proposed regulations would result 

in additional recordkeeping and 

reporting requirements. Fifty-eight 

percent of respondents to the recent 

industry survey indicated that the 2006 

proposed regulations significantly will 

increase recordkeeping burdens and 

accounting costs, but the survey did not 

provide quantified data on the amount 

of any additional time or cost expected 

to result from the 2006 proposed 

regulations. Comments are requested 

estimating the annual number of 

transactions that will result in an 

increased recordkeeping and reporting 

burden, per transaction, under the 2006 

proposed regulations, as well as the 

amount of time and additional cost that 

each additional recordkeeping and 

reporting burden would impose. 

Commentators also have stated that 

accounting for individual taxpayers’

earnings in commingled accounts would 

necessitate additional labor and system 

design costs that would fall 

disproportionately on small business 

QIs. The IRS and the Department of the 

Treasury have not received specific 

comments quantifying the effect of these 

costs on small businesses. Specific 

comments are requested estimating the 

amount of these costs. 

Commentators have asserted that 

complying with the loan 

characterization rules of the 2006 

proposed regulations will result in a 

substantial revenue loss and cause a 

large number of small businesses to fail 

or to reduce their workforces. They 

claimed that small business QIs would 

be disproportionately affected because 

the small business QIs predominantly 

apply a business model that would 

place them at a disadvantage under the 

2006 proposed regulations. 

In general, commentators have 

described two business models 

employed to facilitate deferred like-kind 

exchanges: 

1. The exchange facilitator segregates 

the exchange funds in separate 

accounts, charges a separate fee for its 

services, and pays all earnings to the 

taxpayer, or 

2. The exchange facilitator 

commingles the exchange funds, pays a 

portion of the earnings to the taxpayer 

and retains a portion of the earnings, or 

may retain all of the earnings. Some of 

these exchange facilitators also may 

charge a separate fee for their services. 

If a fee is charged, it is likely to be lower 

than the fee that would be charged if the 

exchange facilitator retains no earnings. 

Some small businesses offer 

customers both forms of structuring the 

transaction. Comments from and 

discussions with industry members, 

however, have disclosed that the first 

model is employed most commonly by 

large businesses often ‘‘affiliated’’ (in 

the sense of having some level of 

corporate relationship and not 

necessarily within the meaning of 

section 1504) with banks. The second 

model also may be employed by large 

businesses but is used widely by 

independent, small business QIs. In the 

recent industry survey, 95.8 percent of 

respondents indicated that they are not 

affiliated with a bank, savings and loan 

company, brokerage firm, or similar 

financial institution. 

The earlier industry survey indicated 

that 96 percent of the small business 

respondents retain at least a portion of 

the interest earned on the exchange 

funds. Commentators have stated that if 

these small businesses are required to 

impute interest on the exchange funds, 

taxpayers will demand that this interest 

be paid to them. According to 

commentators, to compensate for this 

loss of revenue these businesses will be 

required to change their business 

practices to pay all income to the 

taxpayer and to charge higher fees. 

Commentators further stated that absent 

charging higher fees, paying all interest 

to the taxpayer is expected to result in 

a reduction of revenues ranging from 10 

to 80 percent. Specific comments are 

requested estimating the effect on 

revenues or profits of a change in 

business practices to pay all income to 

the taxpayer. 

Some commentators have asserted 

that, in contrast, bank-affiliated QIs 

generally pay all the income to the 

taxpayer under their current business 

practices and therefore will not be 

required to change their business 

practices or charge higher fees as a 

result of the 2006 proposed regulations. 

These commentators claim that bankaffiliated QIs are able to pay all the 

income to the taxpayer and charge fees 

commensurate with the fees charged by 

independent QIs because bank-affiliated 

QIs are compensated through the receipt 

of fees paid by institutions in which the 

funds are deposited. Moreover, these 

commentators maintain that bankaffiliated QIs indirectly benefit when 

funds are deposited with related-party 

depositary institutions that invest 

deposited exchange funds and earn 

income that is not required to be paid 

to the taxpayer under the 2006 proposed 

regulations. If, as these commentators 

claim, bank-affiliated QIs would not be 

required to change their business model 

as a result of the 2006 proposed 

regulations, the commentators predict 

that the 2006 proposed regulations will 

cause many small business QIs to be 

disadvantaged in competing with bankaffiliated QIs. Specific comments are 

requested estimating the number of QIs 

that would change their business model 

as a result of the 2006 proposed 

regulations. 

Significant Alternatives Considered 

Various alternatives to the rules 

contained in the 2006 proposed 

regulations were considered. For 

example, retaining the facts and 

circumstances test of the 1999 proposed 

regulations was considered but rejected 

because the test is difficult for taxpayers 

to apply, lacks administrability, is 

subject to misinterpretation, and may 

result in inconsistent tax treatment of 

similarly-situated taxpayers. 

Rules that would allow the exchange 

facilitator and taxpayer to determine 

which party will be taxed on the 

earnings were considered but regarded 

as lacking certainty and administrability 

and violating established tax principles. 

Rules that would tax the party that 

receives the income (and thus treat only 

income paid and not income retained by 

the QI as the taxpayer’s taxable income) 

were considered but not adopted. Under 

some circumstances, a QI’s retention of 

income earned by an exchange fund is 

properly characterized as a payment of 

compensation by the taxpayer for the 

QI’s services. Therefore, under the 

appropriate circumstances, a rule that 

taxed only the QI on retained earnings 

would violate the doctrine of Old 

Colony Trust v. Commissioner, 279 U.S. 

716 (1929), that a payment that satisfies 

the obligation of a taxpayer to a third 

party is includible in the income of the 

taxpayer. 

A rule that would treat all the 

earnings of the exchange funds in all 

circumstances as the taxpayer’s income 

was considered but lacked flexibility 

and did not conform in all cases to the 

substance of the transaction. Other 

alternatives were considered and not 

adopted because they were considered 

inconsistent with section 7872. In the 

legislative history to section 7872, 

Congress stated that when a service 

provider is permitted to retain customer 

funds without paying interest to the 


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13058 Federal Register / Vol. 72, No. 53 / Tuesday, March 20, 2007 / Proposed Rules 

customer, and the benefit the service 

provider derives from the funds is in 

lieu of a fee for services, the transaction 

is a compensation-related loan under 

section 7872. H.R. Conf. Rep. No. 861, 

98th Cong., 2d Sess. 1019 (1984) (1984–

3 (Vol. 2) CB 272). Moreover, it was 

determined that exchange funds are not 

received in consideration for the sale or 

exchange of property (within the 

meaning of section 1274(c)(1)) or 

received as a deferred payment on 

account of a sale or exchange of 

property (within the meaning of section 

483). 

The industry survey indicates that 30 

percent of respondents closed at least 

half of their deferred like-kind exchange 

transactions within 60 days or less. 

Only eight percent completed at least 

half of their transactions in more than 

150 days. In addition, 42 percent of 

survey respondents reported that at least 

half of their transactions typically 

involve exchange funds of $250,000 or 

less, while about 8 percent of 

respondents reported that most of their 

transactions involve exchange funds in 

excess of $1 million. In light of this 

information, comments specifically are 

requested regarding the average 

duration of exchange transactions, the 

average dollar amount of exchange 

funds, and the appropriateness and 

nature of a de minimis rule that would 

except certain exchange transactions 

from the application of section 7872. 

If exchange funds are characterized as 

loaned by the taxpayer to the exchange 

facilitator, interest may be imputed if 

the exchange facilitator does not pay 

sufficient interest to the taxpayer. To 

reduce the administrative burden of 

determining imputed interest, the 2006 

proposed regulations provide a special 

AFR, equal to the investment rate on a 

182-day Treasury bill, in lieu of the 

short-term AFR (which applies to loans 

of 3 years or less), to qualify as 

sufficient interest for purposes of 

determining whether interest must be 

imputed. This special AFR was 

intended to be a more accurate measure 

of a market rate of interest for these 

loans than the short-term AFR, and was 

expected to result in characterization of 

fewer transactions as below-market 

loans than if the short-term AFR were 

used. Commentators have stated that the 

special AFR is significantly higher than 

the market rate paid on funds held for 

the periods of time that exchange funds 

typically are held by QIs. They state, for 

example, that few if any QIs that pay 

less than all the income to the taxpayer 

pay an amount that is equal to or greater 

than the special AFR provided in the 

2006 proposed regulations. Specific 

comments are requested identifying the 

rate of return typically earned by small 

business QIs on exchange funds, the 

interest rate QIs typically pay to 

taxpayers, and an appropriate rate for 

testing exchange facilitator loans for 

sufficient interest under section 7872. 

Duplicative, Overlapping, and 

Conflicting Rules 

The IRS and the Department of the 

Treasury are not aware of any 

duplicative, overlapping, or conflicting 

Federal rules. 

Kevin M. Brown, 

Deputy Commissioner for Services and 

Enforcement. 

[FR Doc. E7–4968 Filed 3–19–07; 8:45 am] 

BILLING CODE 4830–01–P 

DEPARTMENT OF THE TREASURY 

Internal Revenue Service 

26 CFR Part 1 

[REG–146247–06] 

RIN 1545–BG15 

Corporate Reorganizations; Guidance 

on the Measurement of Continuity of 

Interest 

AGENCY: Internal Revenue Service (IRS), 

Treasury. 

ACTION: Notice of proposed rulemaking 

by cross-reference to temporary 

regulations. 

SUMMARY: In the Rules and Regulations 

section of this issue of the Federal 

Register, the IRS is issuing temporary 

regulations that provide guidance 

regarding the satisfaction of the 

continuity of interest requirement for 

corporate reorganizations. The text of 

those regulations also serves as the text 

of these proposed regulations. 

DATES: Written or electronic comments 

and requests for a public hearing must 

be received by June 18, 2007. 

ADDRESSES: Send submissions to: 

CC:PA:LPD:PR (REG–146247–06), room 

5203, Internal Revenue Service, PO Box 

7604, Ben Franklin Station, Washington, 

DC 20044. Submissions may be handdelivered Monday through Friday 

between the hours of 8 a.m. and 4 p.m. 

to CC:PA: LPD:PR (REG–146247–06), 

Courier’s Desk, Internal Revenue 

Service, 1111 Constitution Avenue, NW, 

Washington, DC, or sent electronically, 

via the Federal eRulemaking Portal at 

http://www.regulations.gov/ (IRS and 

REG–146247–06). 

FOR FURTHER INFORMATION CONTACT: 

Concerning the proposed regulations, 

Lisa S. Dobson at (202) 622–7790; 

concerning submissions of comments 

and requests for a public hearing, Kelly 

Banks at (202) 622–0392 (not toll-free 

numbers). 

SUPPLEMENTARY INFORMATION: 

Background and Explanation of 

Provisions 

Temporary regulations in the Rules 

and Regulations section of this issue of 

the Federal Register amend the Income 

Tax Regulations (26 CFR part 1) relating 

to section 368, which provides for 

general nonrecognition treatment for 

reorganizations. In addition to 

complying with the statutory and 

certain other requirements, to qualify as 

a reorganization, a transaction generally 

must satisfy the continuity of interest 

(COI) requirement. COI requires that, in 

substance, a substantial part of the value 

of the proprietary interests in the target 

corporation be preserved in the 

reorganization. The text of those 

regulations also serves as the text of 

these proposed regulations. The 

preamble to the temporary regulations 

explains the amendments. 

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 Procedure 

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

to these regulations, and because the 

regulation does 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 Requests for Public 

Hearing 

Before the proposed regulations are 

adopted as final regulations, 

consideration will be given to any 

written comments (a signed original and 

eight (8) copies) or electronic comments 

that are submitted timely to the IRS. 

Comments are requested on all aspects 

of the proposed regulations. All 

comments will be available for public 

inspection and copying. A public 

hearing will be scheduled if requested 

in writing by any person that timely 

submits written comments. If a public 

hearing is scheduled, notice of the date, 

time, and place for the public hearing 

will be published in the Federal 

Register. 


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