12974 Federal Register / Vol. 72, No. 53 / Tuesday, March 20, 2007 / Rules and Regulations 

applicable for taxable years beginning 

on or after March 20, 2007. A taxpayer 

may apply § 1.199–(6)(c) to taxable years 

beginning after December 31, 2004, and 

before March 20, 2007. 

■ Par. 7. Section 1.199–8T is amended 

by revising paragraphs (i)(1), (i)(2), 

(i)(3), and (i)(4) to read as follows: 

§ 1.199–8T Other rules (temporary). 

* * * * * 

(i) Effective dates. (1) through (4) 

[Reserved]. For further guidance, see 

§ 1.199–8(i)(1) through (4). 

* * * * * 

Kevin M. Brown, 

Deputy Commissioner for Services and 

Enforcement. 

Approved: March 14, 2007. 

Eric Solomon, 

Assistant Secretary of the Treasury. 

[FR Doc. 07–1354 Filed 3–19–07; 8:45 am] 

BILLING CODE 4830–01–P 

DEPARTMENT OF THE TREASURY 

Internal Revenue Service 

26 CFR Part 1 

[TD 9316] 

RIN 1545–BG14 

Corporate Reorganizations; Guidance 

on the Measurement of Continuity of 

Interest 

AGENCY: Internal Revenue Service (IRS), 

Treasury. 

ACTION: Final and temporary 

regulations. 

SUMMARY: This document contains final 

and temporary regulations that provide 

guidance regarding the satisfaction of 

the continuity of interest requirement 

for corporate reorganizations. These 

regulations affect corporations and their 

shareholders. The text of the temporary 

regulations also serves as the text of the 

proposed regulations set forth in the 

notice of proposed rulemaking on this 

subject in the Proposed Rules section in 

this issue of the Federal Register. 

DATES: Effective Date: These regulations 

are effective March 20, 2007. 

Applicability Date: For dates of 

applicability, see § 1.368–1T(e)(8)(ii). 

FOR FURTHER INFORMATION CONTACT: Lisa 

S. Dobson at (202) 622–7790 (not a tollfree number). 

SUPPLEMENTARY INFORMATION: 

Background and Explanation of 

Provisions 

The Internal Revenue Code of 1986 

(Code) provides general nonrecognition 

treatment for reorganizations described 

in section 368 of the Code. 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. 

On August 10, 2004, the IRS and 

Treasury Department published a notice 

of proposed rulemaking (REG–129706–

04) in the Federal Register (69 FR 

48429) (2004 proposed regulations) 

identifying certain circumstances in 

which the determination of whether a 

proprietary interest in the target 

corporation is preserved would be made 

by reference to the value of the issuing 

corporation’s stock on the day before 

there is an agreement to effect the 

potential reorganization. On September 

16, 2005, the IRS and Treasury 

Department published final regulations 

in the Federal Register (TD 9225, 70 FR 

54631) (2005 final regulations) which 

retained the general framework of the 

2004 proposed regulations but made 

several modifications in response to the 

comments received regarding the 

proposed regulations. Specifically, the 

2005 final regulations provide that in 

determining whether a proprietary 

interest in the target corporation is 

preserved, the consideration to be 

exchanged for the proprietary interests 

in the target corporation pursuant to a 

contract to effect the potential 

reorganization is valued on the last 

business day before the first date such 

contract is a binding contract (the 

signing date), if the contract provides for 

fixed consideration (the signing date 

rule). 

After consideration of comments 

relating to the 2005 final regulations, the 

IRS and Treasury Department are 

revising those regulations as set forth in 

this Treasury decision. These temporary 

regulations provide guidance for 

measuring whether the COI requirement 

is satisfied. The following sections 

specifically describe the revisions. 

A. Applicability of the Signing Date 

Rule 

For purposes of determining whether 

COI is satisfied, the 2005 final 

regulations require the consideration to 

be exchanged for the proprietary 

interests in the target corporation to be 

valued on the last business day before 

the first date such contract is a binding 

contract, if such contract provides for 

fixed consideration. As noted in the 

preamble to the 2005 final regulations, 

the signing date rule is based on the 

principle that, where a binding contract 

provides for fixed consideration, the 

target corporation shareholders can 

generally be viewed as being subject to 

the economic fortunes of the issuing 

corporation as of the signing date. 

However, if the contract does not 

provide for fixed consideration, the 

signing date value of the issuing 

corporation stock is not relevant for 

purposes of determining the extent to 

which a proprietary interest in the target 

corporation is preserved. 

These temporary regulations continue 

to apply the signing date rule where the 

contract provides for fixed 

consideration. If the contract does not 

provide for fixed consideration, the 

temporary regulations provide that the 

signing date rule is not applicable. 

Further, these temporary regulations 

clarify that where fixed consideration 

includes other property that is 

identified by value, that specified value 

is the value of such other property to be 

used in determining whether COI is 

satisfied. 

B. Definition of Fixed Consideration 

As noted above, the temporary 

regulations provide that the signing date 

rule only applies to contracts that 

provide for fixed consideration. These 

temporary regulations modify the 

definition of fixed consideration. 

The 2005 final regulations provide 

four circumstances in which a contract 

will be treated as providing for fixed 

consideration. Generally, under the 

2005 final regulations, a contract 

provides for fixed consideration if (1) 

the contract states the number of shares 

of the issuing corporation plus the 

amount of money and any other 

property to be exchanged for all 

proprietary interests in the target 

corporation; (2) the contract states the 

number of shares of the issuing 

corporation plus the amount of money 

and any other property to be exchanged 

for each proprietary interest in the target 

corporation; (3) the contract states the 

percentage of proprietary interests in the 

target corporation to be exchanged for 

stock of the issuing corporation; or (4) 

the contract states the percentage of 

each proprietary interest in the target 

corporation to be exchanged for stock of 

the issuing corporation. 

These temporary regulations combine 

the first two circumstances into one 

sentence that defines fixed 

consideration. No substantive change to 

these two definitions of fixed 

consideration is intended with this 

amendment. 

The target corporation shareholders 

are generally subject to the economic 

fortunes of the issuing corporation as of 


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Federal Register / Vol. 72, No. 53 / Tuesday, March 20, 2007 / Rules and Regulations 12975 

the signing date only if the contract 

specifies the number of shares of the 

issuing corporation to be exchanged for 

all or each proprietary interest in the 

target corporation. Accordingly, the 

temporary regulations provide that the 

signing date rule is applicable in these 

situations. The IRS and Treasury 

Department request comments regarding 

whether it is appropriate to include in 

the definition of fixed consideration a 

contract that specifies a fixed percentage 

of the shares of the issuing corporation 

to be exchanged for all or each 

proprietary interest in the target 

corporation. 

The temporary regulations eliminate 

the third and fourth circumstances 

described in the 2005 final regulations 

from the definition of fixed 

consideration. Because these types of 

transactions do not specify the number 

of shares of the issuing corporation to be 

received in the exchange, the target 

corporation shareholders are not subject 

to the economic fortunes of the issuing 

corporation as of the signing date. These 

provisions were removed because, in 

such situations, applying the signing 

date rule may produce inappropriate 

results. 

A commentator noted that a 

transaction in which a fixed percentage 

of target corporation shares is 

exchanged for issuing corporation 

shares could inappropriately be 

precluded from satisfying COI due to 

the application of the signing date rule. 

For example, if the number of the 

issuing corporation shares to be 

received by the target corporation 

shareholders depends on the value of 

the issuing corporation shares on the 

closing date, and the issuing corporation 

shares appreciate significantly between 

the signing date and the closing date, 

the signing date rule could prevent a 

transaction from satisfying COI 

notwithstanding the fact that a 

substantial part of the value of the 

proprietary interests in the target 

corporation is exchanged for proprietary 

interests in the issuing corporation. 

Further, the temporary regulations 

continue to treat a contract that provides 

for a shareholder election between 

shares of the issuing corporation stock 

and the money or other property to be 

exchanged for the proprietary interests 

in the target corporation as a contract 

that provides for fixed consideration in 

the circumstances described below. 

C. Shareholder Elections 

The 2005 final regulations contain a 

rule generally stating that a contract that 

permits the target corporation 

shareholders to elect to receive stock 

and/or money and/or other property 

with respect to their target corporation 

stock will be treated as providing for 

fixed consideration if the contract also 

provides the minimum number of 

shares of the issuing corporation stock 

and the maximum amount of money or 

other property to be exchanged for all of 

the proprietary interests in the target 

corporation, the minimum percentage of 

the number of shares of each class of 

proprietary interests in the target 

corporation to be exchanged for stock of 

the issuing corporation, or the minimum 

percentage (by value) of the proprietary 

interests in the target corporation to be 

exchanged for stock of the issuing 

corporation. The 2005 final regulations 

further include two special rules 

prescribing certain assumptions to be 

made in the determination of whether 

COI is satisfied in shareholder election 

cases. For example, in the case in which 

the contract states the minimum number 

of shares of the issuing corporation 

stock and the maximum amount of 

money or other property to be 

exchanged for all of the proprietary 

interests in the target corporation, the 

determination of whether a proprietary 

interest in the target corporation is 

preserved is made by assuming the 

issuance of the minimum number of 

shares of each class of stock of the 

issuing corporation and the maximum 

amount of money or other property 

allowable under the contract and 

without regard to the number of shares 

of each class of stock of the issuing 

corporation and the amount of money or 

other property actually exchanged for 

proprietary interests in the target 

corporation. 

These temporary regulations treat 

certain transactions that allow for 

shareholder elections as providing for 

fixed consideration regardless of 

whether the agreement specifies the 

maximum amount of money or other 

property, or the minimum amount of 

issuing corporation stock, to be 

exchanged in the transaction. As noted 

above, if the target corporation 

shareholders can generally be viewed as 

subject to the economic fortunes of the 

issuing corporation as of the signing 

date, it is appropriate to treat the 

contract as providing for fixed 

consideration and to apply the signing 

date rule. The IRS and Treasury 

Department believe that these 

circumstances exist in cases where the 

target corporation shareholders may 

elect to receive issuing corporation 

stock in exchange for their target 

corporation stock at an exchange rate 

based on the value of the issuing 

corporation stock on the signing date. 

For example, if the issuing corporation 

stock has a value of $1 per share on the 

last business date before the first date on 

which the contract is binding, and the 

agreement provides that the target 

corporation shareholders may exchange 

each share of target corporation stock for 

either $1 or issuing corporation stock 

(based on the signing date value), the 

target corporation shareholders that 

choose to exchange their target 

corporation stock for stock of the issuing 

corporation are subject to the economic 

fortunes of the issuing corporation with 

respect to such stock as of the signing 

date. Accordingly, the IRS and Treasury 

Department believe that it is appropriate 

in such a case to apply the signing date 

rule to value the stock of the issuing 

corporation for purposes of testing 

whether the transaction satisfies the COI 

requirement. 

Additionally, the IRS and Treasury 

Department are concerned that the 

assumptions in the shareholder election 

rule in the 2005 final regulations may 

create confusion about whether COI is 

satisfied based on the delivery of stock 

that does not in fact preserve the target 

corporation shareholders’ proprietary 

interest in the target corporation when 

such result was not intended. For 

example, the rule might appear to 

suggest that stock that is redeemed in 

connection with the potential 

reorganization will nonetheless be 

treated as preserving the target 

corporation shareholders’ proprietary 

interests in the target corporation, 

although this result would be contrary 

to Treas. Reg. 1.368–1(e)(1). Further, 

these assumptions could prevent a 

transaction from satisfying COI even 

though a substantial part of the value of 

the proprietary interests in the target 

corporation is actually exchanged for 

proprietary interests in the issuing 

corporation. 

Because of this potential for 

confusion, and because these 

assumptions are not relevant to the 

revised shareholder election provision, 

the temporary regulations remove the 

assumptions so that the determination 

of whether COI is preserved depends on 

the actual consideration exchanged. 

Example 9 of the Temporary 

Regulations has been modified to 

illustrate the revised rules regarding 

shareholder elections. 

D. Contract Modifications 

The 2005 final regulations generally 

provide that a modification of the 

contract results in a new signing date. 

However, the 2005 final regulations 

provide that a modification that has the 

sole effect of providing for the issuance 

of additional shares of issuing 

corporation stock to the target 


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corporation shareholders will not be 

treated as a modification if the 

execution of the transaction pursuant to 

the original agreement would have 

resulted in the preservation of a 

substantial part of the value of the target 

corporation shareholders’ proprietary 

interests in the target corporation if 

there had been no modification. One 

commentator suggested that this rule be 

broadened to include modifications that 

decrease the money or other property 

that will be delivered to the target 

corporation shareholders. These 

temporary regulations reflect this 

broadening. 

Further, the IRS and Treasury 

Department believe that the signing date 

rule should also apply to provide 

certainty regarding the value of the 

issuing corporation stock used for 

purposes of testing COI if the 

transaction fails to qualify as a tax-free 

reorganization. For this reason, the IRS 

and Treasury Department believe that 

the exception to the modification rule 

should also be available for certain 

types of modifications if the transaction 

fails to satisfy COI at the time of the 

execution of the contract. Accordingly, 

these temporary regulations provide that 

certain contract modifications will not 

result in a new signing date if the terms 

of the original contract would have 

prevented the transaction from 

qualifying as a reorganization. 

E. Contingent Consideration 

The 2005 final regulations provide 

that contingent consideration will 

generally prevent a contract from being 

treated as providing for fixed 

consideration. However, the 2005 final 

regulations provide for a limited 

exception to that general rule. The 

exception applies to cases in which the 

contingent consideration consists solely 

of stock of the issuing corporation and 

the execution of the potential 

reorganization would have resulted in 

the preservation of a substantial part of 

the value of the target corporation 

shareholders’ proprietary interests in 

the target corporation if none of the 

contingent consideration was delivered 

to the target shareholders. The IRS and 

Treasury Department received a number 

of comments regarding the effect of 

contingent consideration on the 

application of the signing date rule. 

A number of commentators suggested 

that the scope of the exception should 

be expanded to include cases in which 

the delivery of the contingent 

consideration to the target corporation 

shareholders does not decrease the ratio 

of the value of the shares of issuing 

corporation stock to the value of the 

money or other property (determined as 

of the last business day before the first 

date there is a binding contract) to be 

delivered to the target corporation 

shareholders relative to the ratio of the 

value of the shares of the issuing 

corporation stock to the value of the 

money or other property (determined as 

of the last business day before the first 

date there is a binding contract) to be 

delivered to the target corporation 

shareholders if none of the contingent 

consideration were delivered to the 

target corporation shareholders. These 

temporary regulations modify and 

expand the applicability of the signing 

date rule to certain transactions that 

provide for contingent adjustments (i.e., 

increases or decreases) to the 

consideration. 

As described above, the signing date 

rule is based on the principle that, 

where a binding contract provides for 

fixed consideration, the target 

corporation shareholders can generally 

be viewed as being subject to the 

economic fortunes of the issuing 

corporation as of the signing date. The 

IRS and Treasury Department believe 

that where this principle holds true, the 

signing date rule should apply 

regardless of whether the transaction 

potentially qualifies as a reorganization, 

and regardless of whether the contract 

provides for certain contingent 

adjustments to the otherwise fixed 

consideration. Accordingly, these 

temporary regulations provide that, 

generally, a contract that otherwise 

qualifies as providing for fixed 

consideration will be treated as 

providing for fixed consideration even if 

it provides for contingent adjustments to 

the consideration, and regardless of 

whether the transaction would have 

satisfied COI in the absence of any 

contingent adjustments. However, if the 

terms of the contingent adjustments 

potentially prevent the target 

corporation shareholders from being 

subject to the economic fortunes of the 

issuing corporation as of the signing 

date, the contract will not be treated as 

providing for fixed consideration. 

Accordingly, these temporary 

regulations provide that a contract will 

not be treated as providing for fixed 

consideration if it provides for 

contingent adjustments to the 

consideration that prevent (to any 

extent) the target shareholders from 

being subject to the economic benefits 

and burdens of ownership of the issuing 

corporation as of the signing date. For 

example, a contract will not be treated 

as providing for fixed consideration if it 

provides for contingent adjustments in 

the event that the value of the stock of 

the issuing corporation, the value of the 

assets of the issuing corporation, or the 

value of any surrogate for either the 

value of the stock of the issuing 

corporation or the assets of the issuing 

corporation increase or decrease after 

the last business day before the first date 

there is a binding contract, or if the 

terms of the contingent adjustment 

provide that any increase or decrease in 

the number of shares of the issuing 

corporation will be computed using any 

value of the issuing corporation shares 

after the last business day before the 

first date the contract is a binding 

contract. 

F. Anti-Dilution Provisions 

These temporary regulations also 

clarify that if the issuing corporation’s 

capital structure is altered and the 

number of shares of the issuing 

corporation to be issued to the target 

corporation shareholders is altered 

pursuant to a customary anti-dilution 

clause, the signing date value of the 

issuing corporation’s shares must be 

adjusted to take this alteration into 

account. 

G. Other Issues 

The IRS and Treasury Department 

continue to study other issues related to 

the determination of whether the COI 

requirement is satisfied. 

Effective Date 

These temporary regulations are 

effective March 20, 2007 and apply to 

transactions occurring pursuant to a 

binding contract entered into after 

September 16, 2005. These temporary 

regulations provide transitional relief 

for certain transactions occurring 

pursuant to a binding contract entered 

into after September 16, 2005, and on or 

before March 20, 2007. Parties to 

transactions within the scope of the 

transitional relief may elect to apply the 

2005 final regulations instead of these 

temporary regulations. Certain parties 

must adopt consistent treatment to 

obtain this relief. 

Special Analyses 

It has been determined that this 

Treasury decision is not a significant 

regulatory action as defined in 

Executive Order 12866. Therefore, a 

regulatory assessment is not required. It 

has also been determined that 5 U.S.C. 

553(b) and (d) do not apply to these 

regulations. For applicability of the 

Regulatory Flexibility Act, please refer 

to the cross-reference notice of proposed 

rulemaking published elsewhere in this 

issue of the Federal Register. Pursuant 

to section 7805(f) of the Internal 

Revenue Code, these regulations were 

submitted to the Chief Counsel for 

Advocacy of the Small Business 


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Federal Register / Vol. 72, No. 53 / Tuesday, March 20, 2007 / Rules and Regulations 12977 

Administration for comment on their 

impact on small business. 

Drafting Information 

The principal author of these 

regulations is Lisa S. Dobson of the 

Office of the Associate Chief Counsel 

(Corporate). However, other personnel 

from the IRS and Treasury Department 

participated in their development. 

List of Subjects in 26 CFR Part 1 

Income taxes, Reporting and 

recordkeeping requirements. 

Amendments to the Regulations 

■ Accordingly, 26 CFR part 1 is 

amended as follows: 

PART 1—INCOME TAXES 

■ Paragraph 1. The authority citation 

for part 1 continues to read, in part, as 

follows: 

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

■ Par. 2. Section 1.368–1 is amended 

by: 

■ 1. Revising paragraph (e)(2). 

■ 2. Redesignating the text of paragraph 

(e)(8) as paragraph (e)(8)(i) and revising 

it. 

■ 3. Adding paragraph (e)(8)(ii). 

The revisions and addition read as 

follows: 

§ 1.368–1 Purpose and scope of exception 

of reorganization exchanges. 

* * * * * 

(e) * * * 

(2) [Reserved]. For further guidance, 

see § 1.368–1T(e)(2). 

* * * * * 

(8) Effective dates—(i) In general. 

Paragraphs (e)(1) and (e)(3) through 

(e)(7) of this section apply to 

transactions occurring after January 28, 

1998, except that they do not apply to 

any transaction occurring pursuant to a 

written agreement which is binding on 

January 28, 1998, and at all times 

thereafter. Paragraph (e)(1)(ii) of this 

section, however, applies to transactions 

occurring after August 30, 2000, unless 

the transaction occurs pursuant to a 

written agreement that is (subject to 

customary conditions) binding on that 

date and at all times thereafter. 

Taxpayers who entered into a binding 

agreement on or after January 28, 1998, 

and before August 30, 2000, may request 

a private letter ruling permitting them to 

apply the final regulations to their 

transaction. A private letter ruling will 

not be issued unless the taxpayer 

establishes to the satisfaction of the IRS 

that there is not a significant risk of 

different parties to the transaction 

taking inconsistent positions, for 

Federal tax purposes, with respect to the 

applicability of the final regulations to 

the transaction. 

(ii) Signing date rule. [Reserved]. For 

further guidance, see § 1.368–

1T(e)(8)(ii). 

■ Par. 3. Section 1.368–1T is added to 

read as follows: 

§ 1.368–1T Purpose and scope of 

exception of reorganization exchanges 

(temporary). 

(a) through (e)(1) [Reserved]. For 

further guidance, see § 1.368–1(a) 

through (e)(1). 

(e)(2) Measuring continuity of 

interest—(i) In general. In determining 

whether a proprietary interest in the 

target corporation is preserved, the 

consideration to be exchanged for the 

proprietary interests in the target 

corporation pursuant to a contract to 

effect the potential reorganization shall 

be valued on the last business day 

before the first date such contract is a 

binding contract, if such contract 

provides for fixed consideration. If a 

portion of the consideration provided 

for in such a contract consists of other 

property identified by value, then this 

specified value of such other property is 

used for purposes of determining the 

extent to which a proprietary interest in 

the target corporation is preserved. If the 

contract does not provide for fixed 

consideration, this paragraph (e)(2)(i) is 

not applicable. 

(ii) Binding contract—(A) In general. 

A binding contract is an instrument 

enforceable under applicable law 

against the parties to the instrument. 

The presence of a condition outside the 

control of the parties (including, for 

example, regulatory agency approval) 

shall not prevent an instrument from 

being a binding contract. Further, the 

fact that insubstantial terms remain to 

be negotiated by the parties to the 

contract, or that customary conditions 

remain to be satisfied, shall not prevent 

an instrument from being a binding 

contract. 

(B) Modifications—(1) In general. If a 

term of a binding contract that relates to 

the amount or type of the consideration 

the target shareholders will receive in a 

potential reorganization is modified 

before the closing date of the potential 

reorganization, and the contract as 

modified is a binding contract, the date 

of the modification shall be treated as 

the first date there is a binding contract. 

(2) Modification of a transaction that 

preserves continuity of interest. 

Notwithstanding paragraph 

(e)(2)(ii)(B)(1) of this section, a 

modification of a term that relates to the 

amount or type of consideration the 

target shareholders will receive in a 

transaction that would have resulted in 

the preservation of a substantial part of 

the value of the target corporation 

shareholders’ proprietary interests in 

the target corporation if there had been 

no modification will not be treated as a 

modification if—

(i) The modification has the sole effect 

of providing for the issuance of 

additional shares of issuing corporation 

stock to the target corporation 

shareholders; 

(ii) The modification has the sole 

effect of decreasing the amount of 

money or other property to be delivered 

to the target corporation shareholders; 

or 

(iii) The modification has the effect of 

decreasing the amount of money or 

other property to be delivered to the 

target corporation shareholders and 

providing for the issuance of additional 

shares of issuing corporation stock to 

the target corporation shareholders. 

(3) Modification of a transaction that 

does not preserve continuity of interest. 

Notwithstanding paragraph 

(e)(2)(ii)(B)(1) of this section, a 

modification of a term that relates to the 

amount or type of consideration the 

target shareholders will receive in a 

transaction that would not have resulted 

in the preservation of a substantial part 

of the value of the target corporation 

shareholders’ proprietary interests in 

the target corporation if there had been 

no modification will not be treated as a 

modification if—

(i) The modification has the sole effect 

of providing for the issuance of fewer 

shares of issuing corporation stock to 

the target corporation shareholders; 

(ii) The modification has the sole 

effect of increasing the amount of 

money or other property to be delivered 

to the target corporation shareholders; 

or 

(iii) The modification has the effect of 

increasing the amount of money or other 

property to be delivered to the target 

corporation shareholders and providing 

for the issuance of fewer shares of 

issuing corporation stock to the target 

corporation shareholders. 

(C) Tender offers. For purposes of this 

paragraph (e)(2), a tender offer that is 

subject to section 14(d) of the Securities 

and Exchange Act of 1934 [15 U.S.C. 

78n(d)(1)] and Regulation 14D (17 CFR 

240.14d–1 through 240.14d–101) and is 

not pursuant to a binding contract, is 

treated as a binding contract made on 

the date of its announcement, 

notwithstanding that it may be modified 

by the offeror or that it is not 

enforceable against the offerees. If a 

modification (not pursuant to a binding 

contract) of such a tender offer is subject 

to the provisions of Regulation 14d–6(c) 

(17 CFR 240.14d–6(c)) and relates to the 


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12978 Federal Register / Vol. 72, No. 53 / Tuesday, March 20, 2007 / Rules and Regulations 

amount or type of the consideration 

received in the tender offer, then the 

date of the modification shall be treated 

as the first date there is a binding 

contract. 

(iii) Fixed Consideration—(A) In 

general. A contract provides for fixed 

consideration if it provides the number 

of shares of each class of stock of the 

issuing corporation, the amount of 

money, and the other property 

(identified either by value or by specific 

description), if any, to be exchanged for 

all the proprietary interests in the target 

corporation, or to be exchanged for each 

proprietary interest in the target 

corporation. A contract that provides a 

target corporation shareholder with an 

election to receive a number of shares of 

stock of the issuing corporation and/or 

money and/or other property in 

exchange for all of the shareholder’s 

proprietary interests in the target 

corporation, or each of the shareholder’s 

proprietary interests in the target 

corporation, provides for fixed 

consideration if the determination of the 

number of shares of issuing corporation 

stock to be provided to the target 

corporation shareholder is determined 

using the value of the issuing 

corporation stock on the last business 

day before the first date there is a 

binding contract. 

(B) Contingent adjustments to the 

consideration—(1) In general. Except as 

provided in paragraph (e)(2)(iii)(B)(2) of 

this section, a contract that provides for 

contingent adjustments to the 

consideration will be treated as 

providing for fixed consideration if it 

would satisfy the requirements of 

paragraph (e)(2)(iii)(A) of this section 

without the contingent adjustment 

provision. 

(2) Exceptions. A contract will not be 

treated as providing for fixed 

consideration if the contract provides 

for contingent adjustments to the 

consideration that prevent (to any 

extent) the target corporation 

shareholders from being subject to the 

economic benefits and burdens of 

ownership of the issuing corporation 

stock after the last business day before 

the first date the contract is a binding 

contract. For example, a contract will 

not be treated as providing for fixed 

consideration if the contract provides 

for contingent adjustments to the 

consideration in the event that the value 

of the stock of the issuing corporation, 

the value of the assets of the issuing 

corporation, or the value of any 

surrogate for either the value of the 

stock of the issuing corporation or the 

assets of the issuing corporation 

increase or decrease after the last 

business day before the first date there 

is a binding contract; or in the event the 

contract provides for contingent 

adjustments to the number of shares of 

the issuing corporation stock to be 

provided to the target corporation 

shareholders computed using any value 

of the issuing corporation shares after 

the last business day before the first date 

there is a binding contract. 

(C) Escrows. Placing part of the 

consideration to be exchanged for 

proprietary interests in the target 

corporation in escrow to secure target’s 

performance of customary pre-closing 

covenants or customary target 

representations and warranties will not 

prevent a contract from being treated as 

providing for fixed consideration. 

(D) Anti-dilution clauses. The 

presence of a customary anti-dilution 

clause will not prevent a contract from 

being treated as providing for fixed 

consideration. However, the absence of 

such a clause will prevent a contract 

from being treated as providing for fixed 

consideration if the issuing corporation 

alters its capital structure between the 

first date there is an otherwise binding 

contract to effect the transaction and the 

effective date of the transaction in a 

manner that materially alters the 

economic arrangement of the parties to 

the binding contract. If the number of 

shares of the issuing corporation to be 

issued to the target corporation 

shareholders is altered pursuant to a 

customary anti-dilution clause, the 

value of the shares determined under 

paragraph (e)(2)(i) of this section must 

be adjusted accordingly. 

(E) Dissenters’ rights. The possibility 

that some shareholders may exercise 

dissenters’ rights and receive 

consideration other than that provided 

for in the binding contract will not 

prevent the contract from being treated 

as providing for fixed consideration. 

(F) Fractional shares. The fact that 

money may be paid in lieu of issuing 

fractional shares will not prevent a 

contract from being treated as providing 

for fixed consideration. 

(iv) Valuation of new issuances. For 

purposes of applying paragraph (e)(2)(i) 

of this section, any class of stock, 

securities, or indebtedness that the 

issuing corporation issues to the target 

corporation shareholders pursuant to 

the potential reorganization and that 

does not exist before the first date there 

is a binding contract to effect the 

potential reorganization is deemed to 

have been issued on the last business 

day before the first date there is a 

binding contract to effect the potential 

reorganization. 

(v) Examples. For purposes of the 

examples in this paragraph (e)(2)(v), P is 

the issuing corporation, T is the target 

corporation, S is a wholly owned 

subsidiary of P, all corporations have 

only one class of stock outstanding, A 

is an individual, no transactions other 

than those described occur, and the 

transactions are not otherwise subject to 

recharacterization. The following 

examples illustrate the application of 

this paragraph (e)(2): 

Example 1. Application of signing date 

rule. On January 3 of Year 1, P and T sign 

a binding contract pursuant to which T will 

be merged with and into P on June 1 of Year 

1. Pursuant to the contract, the T 

shareholders will receive 40 P shares and $60 

of cash in exchange for all of the outstanding 

stock of T. Twenty of the P shares, however, 

will be placed in escrow to secure customary 

target representations and warranties. The P 

stock is listed on an established market. On 

January 2 of Year 1, the value of the P stock 

is $1 per share. On June 1 of Year 1, T merges 

with and into P pursuant to the terms of the 

contract. On that date, the value of the P 

stock is $.25 per share. None of the stock 

placed in escrow is returned to P. Because 

the contract provides for the number of 

shares of P and the amount of money to be 

exchanged for all of the proprietary interests 

in T, under this paragraph (e)(2), there is a 

binding contract providing for fixed 

consideration as of January 3 of Year 1. 

Therefore, whether the transaction satisfies 

the continuity of interest requirement is 

determined by reference to the value of the 

P stock on January 2 of Year 1. Because, for 

continuity of interest purposes, the T stock 

is exchanged for $40 of P stock and $60 of 

cash, the transaction preserves a substantial 

part of the value of the proprietary interest 

in T. Therefore, the transaction satisfies the 

continuity of interest requirement. 

Example 2. Treatment of forfeited 

escrowed stock. (i) Escrowed stock. The facts 

are the same as in Example 1 except that T’s 

breach of a representation results in the 

escrowed consideration being returned to P. 

Because the contract provides for the number 

of shares of P and the amount of money to 

be exchanged for all of the proprietary 

interests in T, under this paragraph (e)(2), 

there is a binding contract providing for fixed 

consideration as of January 3 of Year 1. 

Therefore, whether the transaction satisfies 

the continuity of interest requirement is 

determined by reference to the value of the 

P stock on January 2 of Year 1. Pursuant to 

paragraph (e)(1)(i) of § 1.368–1, for continuity 

of interest purposes, the T stock is exchanged 

for $20 of P stock and $60 of cash, the 

transaction does not preserve a substantial 

part of the value of the proprietary interest 

in T. Therefore, the transaction does not 

satisfy the continuity of interest requirement. 

(ii) Escrowed stock and cash. The facts are 

the same as in paragraph (i) of this Example 

2 except that the consideration placed in 

escrow consists solely of eight of the P shares 

and $12 of the cash. Because the contract 

provides for the number of shares of P and 

the amount of money to be exchanged for all 

of the proprietary interests in T, under this 

paragraph (e)(2), there is a binding contract 

providing for fixed consideration as of 

January 3 of Year 1. Therefore, whether the 


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transaction satisfies the continuity of interest 

requirement is determined by reference to the 

value of the P stock on January 2 of Year 1. 

Pursuant to paragraph (e)(1)(i) of § 1.368–1, 

for continuity of interest purposes, the T 

stock is exchanged for $32 of P stock and $48 

of cash, and the transaction preserves a 

substantial part of the value of the 

proprietary interest in T. Therefore, the 

transaction satisfies the continuity of interest 

requirement. 

Example 3. Redemption of stock received 

pursuant to binding contract. The facts are 

the same as in Example 1 except that A owns 

50 percent of the outstanding stock of T 

immediately prior to the merger and receives 

10 P shares and $30 in the merger and an 

additional 10 P shares upon the release of the 

stock placed in escrow. In connection with 

the merger, A and S agree that, immediately 

after the merger, S will purchase any P shares 

that A acquires in the merger for $1 per 

share. Shortly after the merger, S purchases 

A’s P shares for $20. Because the contract 

provides for the number of shares of P and 

the amount of money to be exchanged for all 

of the proprietary interests in T, under this 

paragraph (e)(2), there is a binding contract 

providing for fixed consideration as of 

January 3 of Year 1. Therefore, whether the 

transaction satisfies the continuity of interest 

requirement is determined by reference to the 

value of the P stock on January 2 of Year 1. 

In addition, S is a person related to P under 

paragraph (e)(4)(i)(A) of § 1.368–1. 

Accordingly, A is treated as exchanging his 

T shares for $50 of cash. Because, for 

continuity of interest purposes, the T stock 

is exchanged for $20 of P stock and $80 of 

cash, the transaction does not preserve a 

substantial part of the value of the 

proprietary interest in T. Therefore, the 

transaction does not satisfy the continuity of 

interest requirement. 

Example 4. Modification of binding 

contract—continuity not preserved. The facts 

are the same as in Example 1 except that on 

April 1 of Year 1, the parties modify their 

contract. Pursuant to the modified contract, 

which is a binding contract, the T 

shareholders will receive 50 P shares (an 

additional 10 shares) and $75 of cash (an 

additional $15 of cash) in exchange for all of 

the outstanding T stock. On March 31 of Year 

1, the value of the P stock is $.50 per share. 

Under this paragraph (e)(2), although there 

was a binding contract providing for fixed 

consideration as of January 3 of Year 1, terms 

of that contract relating to the consideration 

to be provided to the target shareholders 

were modified on April 1 of Year 1. The 

execution of the transaction without 

modification would have resulted in the 

preservation of a substantial part of the value 

of the target corporation shareholders’

proprietary interests in the target corporation 

if there had been no modification. However, 

because the modified contract provides for 

additional P stock and cash to be exchanged 

for all the proprietary interests in T, the 

exception in paragraph (e)(2)(ii)(B)(2) of this 

section does not apply to preserve the 

original signing date. Therefore, whether the 

transaction satisfies the continuity of interest 

requirement is determined by reference to the 

value of the P stock on March 31 of Year 1. 

Because, for continuity of interest purposes, 

the T stock is exchanged for $25 of P stock 

and $75 of cash, the transaction does not 

preserve a substantial part of the value of the 

proprietary interest in T. Therefore, the 

transaction does not satisfy the continuity of 

interest requirement. 

Example 5. Modification of binding 

contract disregarded—continuity preserved. 

The facts are the same as in Example 4 

except that, pursuant to the modified 

contract, which is a binding contract, the T 

shareholders will receive 60 P shares (an 

additional 20 shares as compared to the 

original contract) and $60 of cash in 

exchange for all of the outstanding T stock. 

In addition, on March 31 of Year 1, the value 

of the P stock is $.40 per share. Under this 

paragraph (e)(2), although there was a 

binding contract providing for fixed 

consideration as of January 3 of Year 1, terms 

of that contract relating to the consideration 

to be provided to the target shareholders 

were modified on April 1 of Year 1. 

Nonetheless, the modification has the sole 

effect of providing for the issuance of 

additional P shares to the T shareholders. In 

addition, the execution of the terms of the 

contract without regard to the modification 

would have resulted in the preservation of a 

substantial part of the value of the T 

shareholders’ proprietary interest in T 

because, for continuity of interest purposes, 

the T stock would have been exchanged for 

$40 of P stock and $60 of cash. Pursuant to 

paragraph (e)(2)(ii)(B)(2) of this section, the 

modification is not treated as a modification 

for purposes of paragraph (e)(2)(ii)(B)(1) of 

this section. Accordingly, whether the 

transaction satisfies the continuity of interest 

requirement is determined by reference to the 

value of the P stock on January 2 of Year 1. 

Because, for continuity of interest purposes, 

the T stock is exchanged for $60 of P stock 

and $60 of cash, the transaction preserves a 

substantial part of the value of the 

proprietary interest in T. Therefore the 

transaction satisfies the continuity of interest 

requirement. 

Example 6. New issuance. The facts are the 

same as in Example 1, except that, instead of 

cash, the T shareholders will receive a new 

class of P securities that will be publicly 

traded. In the aggregate, the securities will 

have a stated principal amount of $60 and 

bear interest at the average LIBOR (London 

Interbank Offered Rates) during the 10 days 

prior to the potential reorganization. If the T 

shareholders had been issued the P securities 

on January 2 of Year 1, the P securities would 

have had a value of $60 (determined by 

reference to the value of comparable publicly 

traded securities). Whether the transaction 

satisfies the continuity of interest 

requirement is determined by reference to the 

value of the P stock and the P securities to 

be issued to the T shareholders on January 

2 of Year 1. Under paragraph (e)(2)(iv) of this 

section, for purposes of valuing the new P 

securities, they will be treated as having been 

issued on January 2 of Year 1. Because, for 

continuity of interest purposes, the T stock 

is exchanged for $40 of P stock and $60 of 

other property, the transaction preserves a 

substantial part of the value of the 

proprietary interest in T. Therefore, the 

transaction satisfies the continuity of interest 

requirement. 

Example 7. Fixed consideration—

continuity not preserved. On January 3 of 

Year 1, P and T sign a binding contract 

pursuant to which T will be merged with and 

into P on June 1 of Year 1. Pursuant to the 

contract, 60 shares of the T stock will be 

exchanged for $80 of cash and 40 shares of 

the T stock will be exchanged for 20 shares 

of P stock. On January 2 of Year 1, the value 

of the P stock is $1 per share. On June 1 of 

Year 1, T merges with and into P pursuant 

to the terms of the contract. This contract 

provides for fixed consideration and 

therefore whether the transaction satisfies the 

continuity of interest requirement is 

determined by reference to the value of the 

P stock on January 2 of Year 1. However, 

applying the signing date rule, the P stock 

represents only 20 percent of the value of the 

total consideration to be received by the T 

shareholders. Accordingly, based on the 

economic realities of the exchange, the 

transaction does not preserve a substantial 

part of the value of the proprietary interest 

in T. Therefore, the transaction does not 

satisfy the continuity of interest requirement. 

Example 8. Anti-dilution clause. (i) 

Absence of anti-dilution clause. On January 

3 of Year 1, P and T sign a binding contract 

pursuant to which T will be merged with and 

into P on June 1 of Year 1. Pursuant to the 

contract, the T shareholders will receive 40 

P shares and $60 of cash in exchange for all 

of the outstanding stock of T. The contract 

does not contain a customary anti-dilution 

provision. The P stock is listed on an 

established market. On January 2 of Year 1, 

the value of the P stock is $1 per share. On 

April 10 of Year 1, P issues its stock to effect 

a stock split; each shareholder of P receives 

an additional share of P for each P share that 

it holds. On April 11 of Year 1, the value of 

the P stock is $.50 per share. Because P 

altered its capital structure between January 

3 and June 1 of Year 1 in a manner that 

materially alters the economic arrangement 

of the parties, under paragraph (e)(2)(iii)(D) 

of this section, the contract is not treated as 

a binding contract that provides for fixed 

consideration. Accordingly, whether the 

transaction satisfies the continuity of interest 

requirement cannot be determined by 

reference to the value of the P stock on 

January 2 of Year 1. 

(ii) Adjustment for anti-dilution clause. 

The facts are the same as in paragraph (i) of 

this Example 8 except that the contract 

contains a customary anti-dilution provision, 

and the T shareholders receive 80 P shares 

and $60 of cash in exchange for all of the 

outstanding stock of T. Under paragraph 

(e)(2)(iii)(D) of this section, the contract is 

treated as a binding contract that provides for 

fixed consideration as of January 3 of Year 1. 

Therefore, whether the transaction satisfies 

the continuity of interest requirement is 

generally determined by reference to the 

value of the P stock on January 2 of Year 1. 

However, under paragraph (e)(2)(iii)(D) of 

this section, the value of the P stock on 

January 2 of Year 1 must be adjusted to take 

the stock split into account. For continuity of 

interest purposes, the T stock is exchanged 

for $40 of P stock (($1÷2) × 80) and $60 of 


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cash. Therefore, the transaction satisfies the 

continuity of interest requirement. 

Example 9. Shareholder election. On 

January 3 of Year 1, P and T sign a binding 

contract pursuant to which T will be merged 

with and into P on June 1 of Year 1. On 

January 2 of Year 1, the value of the P stock 

and the T stock is $1 per share. Pursuant to 

the contract, at the shareholders’ election, 

each share of T will be exchanged for cash 

of $1, or alternatively, P stock. The contract 

provides that the determination of the 

number of shares of P stock to be exchanged 

for a share of T stock is made using the value 

of the P stock on the last business day before 

the first date there is a binding contract (i.e., 

$1 per share). Accordingly, the contract 

provides for fixed consideration, and the 

determination of whether the transaction 

satisfies the continuity of interest 

requirement is based on the number of shares 

of P stock the T shareholders receive in the 

exchange and by reference to the value of the 

P stock on January 2 of Year 1. 

Example 10. Contingent adjustment based 

on the value of the issuing corporation 

stock—continuity not preserved. On January 

3 of Year 1, P and T sign a binding contract 

pursuant to which T will be merged with and 

into P on June 1 of Year 1. On January 2 of 

Year 1, the value of the P stock is $1 per 

share. Pursuant to the contract, if the value 

of the P stock does not decrease after January 

2 of Year 1, the T shareholders will receive 

40 P shares and $60 of cash in exchange for 

all of the outstanding stock of T. 

Furthermore, the contract provides that the T 

shareholders will receive $.16 of additional 

P shares and $.24 for every $.01 decrease in 

the value of one share of P stock after January 

2 of Year 1. On June 1 of Year 1, T merges 

with and into P pursuant to the terms of the 

contract. On that date, the value of the P 

stock is $.40 per share. Pursuant to the terms 

of the contract, the consideration is adjusted 

so that the T shareholders receive 24 more P 

shares ((60 × $.16)/$.40) and $14.40 more 

cash (60 × $.24) than they would absent an 

adjustment. Accordingly, at closing the T 

shareholders receive 64 P shares and $74.40 

of cash. Because the contract provides that 

additional P shares and cash will be 

delivered to the T shareholders if the value 

of the stock of P decreases after January 2 of 

Year 1, under paragraph (e)(2)(iii)(B)(2) of 

this section, the contract is not treated as 

providing for fixed consideration, and 

therefore whether the transaction satisfies the 

continuity of interest requirement cannot be 

determined by reference to the value of the 

P stock on January 2 of Year 1. For continuity 

of interest purposes, the T stock is exchanged 

for $25.60 of P stock (64 × $.40) and $74.40 

of cash and the transaction does not preserve 

a substantial part of the value of the 

proprietary interest in T. Therefore, the 

transaction does not satisfy the continuity of 

interest requirement. 

Example 11. Contingent adjustment to boot 

based on the value of the target corporation 

stock—continuity not preserved. On January 

3 of Year 1, P and T sign a binding contract 

pursuant to which T will be merged with and 

into P on June 1 of Year 1. On January 2 of 

Year 1, T has 100 shares outstanding, and 

each T share is worth $1. On January 2 of 

Year 1, each P share is worth $1. Pursuant 

to the contract, if the value of the T stock 

does not increase after January 3 of Year 1, 

the T shareholders will receive 40 P shares 

and $60 of cash in exchange for all of the 

outstanding stock of T. Furthermore, the 

contract provides that the T shareholders will 

receive $1 of additional cash for every $.01 

increase in the value of one share of T stock 

after January 3 of Year 1. On June 1 of Year 

1, the value of the T stock is $1.40 per share 

and the value of the P stock is $.75 per share. 

Pursuant to the terms of the contract, the 

consideration is adjusted so that the T 

shareholders receive $40 more cash (40 × $1) 

than they would absent an adjustment. 

Accordingly, at closing the T shareholders 

receive 40 P shares and $100 of cash. Because 

the contract provides the number of shares of 

P stock and the amount of money to be 

exchanged for all the proprietary interests in 

T, and the contingent adjustment to the cash 

consideration is not based on changes in the 

value of the P stock, P assets, or any surrogate 

thereof, after January 2 of Year 1, there is a 

binding contract providing for fixed 

consideration as of January 3 of Year 1. 

Therefore, whether the transaction satisfies 

the continuity of interest requirement is 

determined by reference to the value of the 

P stock on January 2 of Year 1. For continuity 

of interest purposes, the T stock is exchanged 

for $40 of P stock (40 × $1) and $100 of cash. 

Therefore, the transaction does not satisfy the 

continuity of interest requirement. 

Example 12. Contingent adjustment to 

stock based on the value of the target 

corporation stock—continuity preserved. On 

January 3 of Year 1, P and T sign a binding 

contract pursuant to which T will be merged 

with and into P on June 1 of Year 1. On that 

date T has 100 shares outstanding, and each 

T share is worth $1. On January 2 of Year 1, 

each P share is worth $1. Pursuant to the 

contract, if the value of the T stock does not 

decrease after January 3 of Year 1, the T 

shareholders will receive 40 P shares and $60 

of cash in exchange for all of the outstanding 

stock of T. Furthermore, the contract 

provides that the T shareholders will receive 

$.40 less P stock and $.60 less cash for every 

$.01 decrease in the value of one share of T 

stock after January 3 of Year 1. The contract 

also provides that the number of P shares by 

which the consideration will be reduced as 

a result of this adjustment will be determined 

based on the value of the P stock on January 

2 of Year 1. On June 1 of Year 1, T merges 

with and into P pursuant to the terms of the 

contract. On that date, the value of the T 

stock is $.70 per share and the value of the 

P stock is $.75 per share. Pursuant to the 

terms of the contract, the consideration is 

adjusted so that the T shareholders receive 12 

fewer P shares ((30 × $.40)/$1) and $18 less 

cash (30 × $.60) than they would absent an 

adjustment. Accordingly, at closing the T 

shareholders receive 28 P shares and $42 of 

cash. Because the contract provides for the 

number of shares of P stock and the amount 

of money to be exchanged for all of the 

proprietary interests in T, the contract does 

not provide for contingent adjustments to the 

consideration based on a change in value of 

the P stock, P assets, or any surrogate thereof, 

after January 2 of Year 1, and the adjustment 

to the number of P shares the T shareholders 

receive is determined based on the value of 

the P shares on January 2 of Year 1, there is 

a binding contract providing for fixed 

consideration as of January 3 of Year 1. 

Therefore, whether the transaction satisfies 

the continuity of interest requirement is 

determined by reference to the value of the 

P stock on January 2 of Year 1. For continuity 

of interest purposes, the T stock is exchanged 

for $28 of P stock (28 × $1) and $42 of cash. 

Therefore, the transaction satisfies the 

continuity of interest requirement. 

(e)(3) through (7) [Reserved]. For 

further guidance, see § 1.368–1(e)(3) 

through (7). 

(8) Effective dates. (i) [Reserved]. For 

further guidance, see § 1.368–1(e)(8)(i). 

(ii) Signing date rule. Paragraph (e)(2) 

of this section applies to transactions 

occurring pursuant to binding contracts 

entered into after September 16, 2005. 

For transactions occurring pursuant to 

binding contracts entered into after 

September 16, 2005, and on or before 

March 20, 2007, the parties to the 

transaction may elect to apply the 

provisions of § 1.368–1(e)(2) as 

contained in 26 CFR part 1, revised 

April 1, 2006, instead of the provisions 

of this paragraph (e)(2). However, the 

target corporation, the issuing 

corporation, the controlling corporation 

of the acquiring corporation if stock 

thereof is provided as consideration in 

the transaction, and any direct or 

indirect transferee of transferred basis 

property from any of the foregoing, may 

not elect to apply the provisions of 

§ 1.368–1(e)(2) as contained in 26 CFR 

part 1, revised April 1, 2006, unless all 

such taxpayers elect to apply the 

provisions of such regulations. This 

election requirement will be satisfied if 

none of the specified parties adopts 

inconsistent treatment. The 

applicability of this section expires on 

or before March 19, 2010. 

Kevin M. Brown, 

Deputy Commissioner for Services and 

Enforcement. 

Approved: March 14, 2007. 

Eric Solomon, 

Assistant Secretary of the Treasury (Tax 

Policy). 

[FR Doc. E7–5128 Filed 3–19–07; 8:45 am] 

BILLING CODE 4830–01–P 

DEPARTMENT OF THE TREASURY 

Office of Foreign Assets Control 

31 CFR Parts 538 and 560 

Sudanese Sanctions Regulations; 

Iranian Transactions Regulations 

AGENCY: Office of Foreign Assets 

Control, Treasury. 


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