58650 Federal Register / Vol. 65, No. 191 / Monday, October 2, 2000 / Rules and Regulations

(ii) With respect to a hard copy of the

Disclosure Document, a sticker affixed

to the Disclosure Document; or

(iii) Other similar means.

(3) The pool operator may not use the

Disclosure Document or profile

document until such correction has

been made.

* * * * *

(d) Except as provided by § 4.8:

(1) The commodity pool operator

must file with the Commission one copy

of the Disclosure Document and, where

used, profile document for each pool

that it operates or that it intends to

operate not less than 21 calendar days

prior to the date the pool operator first

intends to deliver such Document or

documents to a prospective participant

in the pool; and

(2) The commodity pool operator

must file with the Commission one copy

of the subsequent amendments to the

Disclosure Document and, where used,

profile document for each pool that it

operates or that it intends to operate

within 21 calendar days of the date

upon which the pool operator first

knows or has reason to know of the

defect requiring the amendment.

5. Section 4.36 is amended by revising

paragraph (d) to read as follows:

§ 4.36 Use, amendment and filing of

Disclosure Document.

* * * * *

(d)(1) The commodity trading advisor

must file with the Commission one copy

of the Disclosure Document for trading

program that it offers or that it intends

to offer not less than 21 calendar days

prior to the date the trading advisor first

intends to deliver the Document to a

prospective client in the trading

program; and

(2) The commodity trading advisor

must file with the Commission one copy

of the subsequent amendments to the

Disclosure Document for each trading

program that it offers or that it intends

to offer within 21 calendar days of the

date upon which the trading advisor

first knows or has reason to know of the

defect requiring the amendment.

Issued in Washington, DC, on September

25, 2000 by the Commission.

Jean A. Webb,

Secretary of the Commission.

[FR Doc. 00–24984 Filed 9–29–00; 8:45 am]

BILLING CODE 6351–01–M

DEPARTMENT OF THE TREASURY

Internal Revenue Service

26 CFR Part 1

[TD 8904]

RIN 1545–AX38

Treatment of Nonqualified Preferred

Stock and Other Preferred Stock in

Certain Exchanges and Distributions

AGENCY: Internal Revenue Service (IRS),

Treasury.

ACTION: Final regulations.

SUMMARY: This document contains final

regulations relating to nonqualified

preferred stock. The 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

corporate reorganizations and

distributions. The regulations are

necessary to reflect changes to the law

concerning these types of preferred

stock that were made by the Taxpayer

Relief Act of 1997.

EFFECTIVE DATE: These regulations are

effective October 2, 2000.

FOR FURTHER INFORMATION CONTACT:

Richard E. Coss, (202) 622–7790 (not a

toll-free number).

SUPPLEMENTARY INFORMATION:

Background and Explanation of

Provisions

On January 26, 2000, the IRS and

Treasury published in the Federal

Register a notice of proposed

rulemaking (REG–105089–99, 2000–6

I.R.B. 580 [65 FR 4203]) relating to

nonqualified preferred stock (as defined

in section 351(g)(2) of the Internal

Revenue Code) (NQPS). The proposed

regulations address the effective date of

the definition of NQPS, and provide

rules exempting from treatment as

NQPS certain preferred stock received

by shareholders in corporate

reorganizations and distributions

subject to sections 354, 355, and 356.

No comments responding to the

notice of proposed rulemaking were

submitted, and no public hearing was

requested or held. However, one

commentator suggested that the rule in

the proposed regulations interpreting

section 351(g)(2)(C)(i)(II) (relating to

preferred stock transferred in

connection with the performance of

services) should be expanded to include

transactions subject to section 351.

The IRS and Treasury agree with this

suggestion. Accordingly, these final

regulations extend the exemption from

treatment as NQPS in § 1.356–7(c) to

preferred stock received by shareholders

in certain stock exchanges under section

351. The proposed regulations are

adopted as revised by this Treasury

decision.

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 section

553(b) of the Administrative Procedure

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, the notice of proposed rulemaking

preceding these regulations was

submitted to the Chief Counsel for

Advocacy of the Small Business

Administration for comment on its

impact on small business.

Drafting Information

The principal author of these

regulations is Richard E. Coss of the

Office of Associate 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.

Adoption of Amendments to the

Regulations

Accordingly, 26 CFR part 1 is

amended as follows:

PART 1—INCOME TAXES

Paragraph 1. The authority citation

for part 1 is amended by adding the

following entries in numerical order to

read in part as follows:

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

Section 1.351–2 also issued under 26

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

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 1.351–2 is amended by

adding paragraph (e) to read as follows:

§ 1.351–2 Receipt of property.

* * * * *

(e) See § 1.356–7(a) for the

applicability of the definition of

Federal Register / Vol. 65, No. 191 / Monday, October 2, 2000 / Rules and Regulations 58651

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)(2) of the Taxpayer Relief Act of

1997, Public Law 105–34 (111 Stat. 788,

921). 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 1.354–1 is amended by

adding paragraph (f) to read as follows:

§ 1.354–1 Exchanges of stock and

securities in certain reorganizations.

* * * * *

(f) 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. 4. Section 1.355–1 is amended by

adding paragraph (d) to read as follows:

§ 1.355–1 Distribution 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. 5. 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). For purposes of this

section, preferred stock that is not NQPS

is referred to as Qualified Preferred

Stock (QPS).

(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 QPS, 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 QPS, provided—

(i) The original preferred stock is QPS

solely because, on its issue date, either

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, or

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 that, in

relation to any term or terms of the

original preferred stock, either decrease

the period in which a right or obligation

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

section 351(g)(2)(A) can be exercised, or

increase the likelihood that such a right

or obligation will 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

(ii) 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 351(g)(1),

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 § 1.356–6, the principles of

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

section apply.

(e) Examples. In the examples in this

paragraph (e), T and P are corporations,

A is a shareholder of T, and A

surrenders and receives (in addition to

the stock exchanged in the examples)

common stock in the reorganizations

described. The following examples

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

this section:

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

58652 Federal Register / Vol. 65, No. 191 / Monday, October 2, 2000 / Rules and Regulations

redemption did not become more likely than

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 that 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 October 2, 2000.

Par. 6. Section 1.1036–1 is amended

by adding paragraph (d) to read 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)(2) of the Taxpayer Relief

Act of 1997, Public Law 105–34 (111

Stat. 788, 921).

Robert E. Wenzel,

Deputy Commissioner of Internal Revenue.

Approved: September 25, 2000.

Jonathan Talisman,

Acting Assistant Secretary of the Treasury.

[FR Doc. 00–25258 Filed 9–29–00; 8:45 am]

BILLING CODE 4830–01–U

DEPARTMENT OF TRANSPORTATION

Coast Guard

33 CFR Part 100

[CGD 05–00–043]

RIN 2115–AE46

Special Local Regulations for Marine

Events; Fountain Power Boats

Offshore Race, Pamlico River,

Washington, North Carolina

AGENCY: Coast Guard, DOT.

ACTION: Temporary final rule.

SUMMARY: The Coast Guard is adopting

temporary special local regulations

during the Fountain Power Boats

Offshore Race, to be held October 13, 14

and 15, 2000, on the waters of the

Pamlico River, Washington, North

Carolina. These special local regulations

are necessary to provide for the safety of

life on navigable waters during the

event. This action is intended to restrict

vessel traffic in portions of the Pamlico

River during the event.

DATES: This rule is effective from 6 a.m.

on October 13, 2000, to 5 p.m. on

October 15, 2000.

ADDRESSES: Comments and materials

received from the public as well as

documents indicated in this preamble as

being available in the docket, are part of

docket CGD05–00–043 and are available

for inspection or copying at Commander

(Aoax), Fifth Coast Guard District, 431

Crawford Street, Portsmouth, Virginia

23704–5004, between 9 a.m. and 2 p.m.,

Monday through Friday, except Federal

holidays.

FOR FURTHER INFORMATION CONTACT: S. L.

Phillips, Marine Events Coordinator,

Commander (Aoax), Fifth Coast Guard

District, 431 Crawford Street,

Portsmouth, Virginia 23704–5004,

telephone number (757) 398–6204.

SUPPLEMENTARY INFORMATION:

Regulatory Information

A notice of proposed rulemaking

(NPRM) was not published for this

regulation. Under 5 U.S.C. 553(b)(B), the

Coast Guard finds that good cause exists

for not publishing a NPRM and for

making the rule effective less than 30

days after publication in the Federal

Register. The Coast Guard received

confirmation of the request for special

local regulations on August 24, 2000.

We were notified of the event with

insufficient time to publish a NPRM,

allow for comments, and publish a final

rule prior to the event.

Background and Purpose

On October 13, 14, and 15, 2000,

Fountain Power Boats will sponsor the

Fountain Power Boats Offshore Race, on

the Pamlico River, Washington, North

Carolina. The event will consist of

approximately 50 high speed power

boats racing in heats along a 5 mile oval

course. A fleet of spectator vessels is

anticipated. Due to the need for vessel

control during the event, vessel traffic

will be temporarily restricted to provide

for the safety of participants, spectators

and transiting vessels.

Discussion of Regulations

The Coast Guard is establishing

temporary special local regulations on

specified waters of the Pamlico River.

The temporary special local regulations

will be enforced from 6 a.m. to 5 p.m.

on October 13, 14 and 15, 2000. The

effect will be to restrict general

navigation in the regulated area during