66082 Federal Register / Vol. 60, No. 245 / Thursday, December 21, 1995 / Rules and Regulations

acquired by S in the merger. Consequently,

neither P nor S has taxable gain or deductible

loss on the exchange of those shares. Under

paragraph (c) of this section, however, S

recognizes $10 of gain on the exchange of its

P stock in the reorganization because S did

not receive the P stock from P pursuant to the

plan of reorganization. See § 1.358–6(d) for

the effect on P’s basis in its S stock.

(e) Effective date. This section applies to

triangular reorganizations occurring on or

after December 23, 1994.

Par. 5. Section 1.1502–30 is added to

read as follows:

§ 1.1502–30 Stock basis after certain

triangular reorganizations.

(a) Scope. This section provides rules

for determining the basis of the stock of

an acquiring corporation as a result of

a triangular reorganization. The

definitions and nomenclature contained

in § 1.358–6 apply to this section.

(b) General rules—(1) Forward

triangular merger, triangular C

reorganization, or triangular B

reorganization. P adjusts its basis in the

stock of S as a result of a forward

triangular merger, triangular C

reorganization, or triangular B

reorganization under § 1.358–6(c) and

(d), except that § 1.358–6 (c)(1)(ii) and

(d)(2) do not apply. Instead, P adjusts

such basis by taking into account the

full amount of—

(i) T liabilities assumed by S or the

amount of liabilities to which the T

assets acquired by S are subject, and

(ii) The fair market value of any

consideration not provided by P

pursuant to the plan of reorganization.

(2) Reverse triangular merger. If P

adjusts its basis in the T stock acquired

as a result of a reverse triangular merger

under § 1.358–6 (c)(2)(i) and (d),

§ 1.358–6 (c)(1)(ii) and (d)(2) do not

apply. Instead, P adjusts such basis by

taking into account the full amount of—

(i) T liabilities deemed assumed by S

or the amount of liabilities to which the

T assets deemed acquired by S are

subject, and

(ii) The fair market value of any

consideration not provided by P

pursuant to the plan of reorganization.

(3) Excess loss accounts. Negative

adjustments under this section may

exceed P’s basis in its S or T stock. The

resulting negative amount is P’s excess

loss account in its S or T stock. See

§ 1.1502–19 for rules treating excess loss

accounts as negative basis, and treating

references to stock basis as including

references to excess loss accounts.

(4) Application of other rules of law.

The rules for this section are in addition

to other rules of law. See § 1.1502–80(d)

for the non-application of section 357(c)

to P.

(5) Examples. The rules of this

paragraph (b) are illustrated by the

following examples. For purposes of

these examples, P, S, and T are domestic

corporations, P and S file consolidated

returns, P owns all of the only class of

S stock, the P stock exchanged in the

transaction satisfies the requirements of

the applicable triangular reorganization

provisions, the facts set forth the only

corporate activity, and tax liabilities are

disregarded.

Example 1. Liabilities. (a) Facts. T has

assets with an aggregate basis of $60 and fair

market value of $100. T’s assets are subject

to $70 of liabilities. Pursuant to a plan, P

forms S with $5 of cash (which S retains),

and T merges into S. In the merger, the T

shareholders receive P stock worth $30 in

exchange for their T stock. The transaction is

a reorganization to which sections 368

(a)(1)(A) and (a)(2)(D) apply.

(b) Basis adjustment. Under § 1.358–6, P

adjusts its $5 basis in the S stock as if P had

acquired the T assets with a carryover basis

under section 362 and transferred these

assets to S in a transaction in which P

determines its basis in the S stock under

section 358. Under the rules of this section,

the limitation described in § 1.358–6(c)(1)(ii)

does not apply. Thus, P adjusts its basis in

the S stock by –$10 (the aggregate adjusted

basis of T’s assets decreased by the amount

of liabilities to which the T assets are

subject). Consequently, as a result of the

reorganization, P has an excess loss account

of $5 in its S stock.

Example 2. Consideration not provided by

P. (a) Facts. T has assets with an aggregate

basis of $10 and fair market value of $100

and no liabilities. S is an operating company

with substantial assets that has been in

existence for several years. P has a $5 basis

in its S stock. Pursuant to a plan, T merges

into S and the T shareholders receive $70 of

P stock provided by P pursuant to the plan

of reorganization and $30 of cash provided

by S in exchange for their T stock. The

transaction is a reorganization to which

sections 368 (a)(1)(A) and (a)(2)(D) apply.

(b) Basis adjustment. Under § 1.358–6, P

adjusts its $5 basis in the S stock as if P had

acquired the T assets with a carryover basis

under section 362 and transferred these

assets to S in a transaction in which P

determines its basis in the S stock under

section 358. Under the rules of this section,

the limitation described in § 1.358–6(d)(2)

does not apply. Thus, P adjusts its basis in

the S stock by –$20 (the aggregate adjusted

basis of T’s assets decreased by the fair

market value of the consideration provided

by S). As a result of the reorganization, P has

an excess loss account of $15 in its S stock.

(c) Appreciated asset. The facts are the

same as in paragraph (a) of this Example 2,

except that in the reorganization S provides

an asset with a $20 adjusted basis and $30

fair market value instead of $30 cash. The

basis is adjusted in the same manner as in

paragraph (b) of this Example 2. In addition,

because S recognizes a $10 gain from the

asset under section 1001, P’s basis in its S

stock is increased under § 1.1502–32(b) by

S’s $10 gain. Consequently, as a result of the

reorganization, P has an excess loss account

of $5 in its S stock. (The results would be the

same if the appreciated asset provided by S

was P stock with respect to which S

recognized gain. See § 1.1032–2(c)).

Example 3. Reverse triangular merger. (a)

Facts. T has assets with an aggregate basis of

$60 and fair market value of $100. T’s assets

are subject to $70 of liabilities. P owns all of

the only class of S stock. P has a $5 basis in

its S stock. Pursuant to a plan, S merges into

T with T surviving. In the merger, the T

shareholders exchange their T stock for $2

cash from P and $28 worth of P stock

provided by P pursuant to the plan. The

transaction is a reorganization to which

sections 368 (a)(1)(A) and (a)(2)(E) apply.

(b) Basis adjustment. Under § 1.358–6, P’s

basis in the T stock acquired equals its $5

basis in its S stock immediately before the

transaction adjusted by the $60 basis in the

T assets deemed transferred, and the $70 of

liabilities to which the T assets are subject.

Under the rules of this section, the limitation

described in § 1.358–6(c)(1)(ii) does not

apply. Consequently, P has an excess loss

account of $5 in its T stock as a result of the

transaction.

(c) Effective date. This section applies

to reorganizations occurring on or after

December 21, 1995.

Margaret Milner Richardson,

Commissioner of Internal Revenue.

Approved: December 12, 1995.

Leslie Samuels,

Assistant Secretary of the Treasury.

[FR Doc. 95–30875 Filed 12–20–95; 8:45 am]

BILLING CODE 4830–01–U

26 CFR Parts 1 and 602

[TD 8631]

RIN 1545–AT79

Notice of Significant Reduction in the

Rate of Future Benefit Accrual;

Correction

AGENCY: Internal Revenue Service (IRS),

Treasury.

ACTION: Correction to final regulations.

SUMMARY: This document contains a

correction to the final regulations (TD

8631) which were published in the

Federal Register for Friday, December

15, 1995 (60 FR 64320). The final

regulations provide guidance

concerning the requirements of section

204(h) of the Employee Retirement

Income Security Act of 1974, as

amended (ERISA), relating to defined

benefit plans and to individual account

plans that are subject to the finding

standards of section 302 of ERISA.

EFFECTIVE DATE: December 15, 1995.

FOR FURTHER INFORMATION CONTACT:

Betty J. Clary (202) 622–6070 (not a tollfree number).
Federal Register / Vol. 60, No. 245 / Thursday, December 21, 1995 / Rules and Regulations 66083

SUPPLEMENTARY INFORMATION:

Background

The final regulations that are the

subject of this correction are under

section 411 of the Internal Revenue

Code.

Need for Correction

As published, TD 8631 contains an

error which is in need of correction.

Correction of Publication

Accordingly, the publication to the

final regulations which is the subject of

FR Doc. 95–30416, is corrected as

follows:

On page 64321, column 3, in the

preamble, following the paragraph

heading Effective Dates, line 5, the

language ‘‘or after January 2, 1996.’’ is

corrected to read ‘‘or after December 30,

1995.’’.

Michael Slaughter,

Acting Chief, Regulations Unit, Assistant

Chief Counsel (Corporate).

[FR Doc. 95–30977 Filed 12–15–95; 3:31 pm]

BILLING CODE 4830–01–U

26 CFR Parts 1 and 602

[TD 8649]

RIN 1545–AS87

Regulations Under Section 1258 of the

Internal Revenue Code of 1986; Netting

Rule for Certain Conversion

Transactions

AGENCY: Internal Revenue Service (IRS),

Treasury.

ACTION: Final regulations.

SUMMARY: This document contains final

regulations relating to conversion

transactions. These regulations provide

that certain gains and losses from

positions of the same conversion

transaction may be netted for purposes

of determining the amount of gain that

is recharacterized as ordinary income.

These regulations reflect changes to the

law made by the Revenue

Reconciliation Act of 1993 and affect

persons who enter into conversion

transactions.

DATES: These regulations are effective

December 21, 1995.

For applicability of these regulations,

see EFFECTIVE DATES under the

SUPPLEMENTARY INFORMATION part of the

preamble.

FOR FURTHER INFORMATION CONTACT:

Alan B. Munro, (202) 622–3950 (not a

toll-free number).

SUPPLEMENTARY INFORMATION:

Paperwork Reduction Act

The collection of information

contained in these final regulations has

been reviewed and approved by the

Office of Management and Budget in

accordance with the Paperwork

Reduction Act (44 U.S.C. 3507) under

control number 1545–1452. Responses

to this collection of information are

required to obtain netting relief for

conversion transactions.

An agency may not conduct or

sponsor, and a person is not required to

respond to, a collection of information

unless the collection of information

displays a valid control number.

The estimated annual burden per

recordkeeper varies from .05 to 10

hours, depending on individual

circumstances, with an estimated

average of .10 hour.

Comments concerning the accuracy of

this burden estimate and suggestions for

reducing this burden should be sent to

the Internal Revenue Service, Attn: IRS

Reports Clearance Officer, T:FP,

Washington, DC 20224, and to the

Office of Management and Budget, Attn:

Desk Officer for the Department of the

Treasury, Office of Information and

Regulatory Affairs, Washington, DC

20503.

Books or records relating to this

collection of information must be

retained as long as their contents may

become material in the administration

of any internal revenue law. Generally,

tax returns and tax return information

are confidential, as required by 26

U.S.C. 6103.

Background

On December 27, 1994, the IRS

published in the Federal Register a

notice of proposed rulemaking and

notice of public hearing at 59 FR 66498

(FI–43–94) under section 1258 of the

Internal Revenue Code of 1986.

The IRS received a number of written

comments on the proposed regulations.

No requests to speak at the public

hearing were received, however, and

consequently the hearing was cancelled.

Explanation of Provisions

A. General

The proposed regulations allow

taxpayers to net gains and losses on the

positions of certain conversion

transactions for purposes of section

1258(a). For a taxpayer to be eligible, the

proposed regulations require the

taxpayer to identify, before the close of

the day on which the positions become

part of the conversion transaction, all

the positions that are part of the

conversion transaction. In addition, the

taxpayer has to dispose of all the

positions within a 14-day period that is

within a single taxable year. The

proposed regulations also define builtin loss and prohibit the netting of builtin loss against gain.

The commenters uniformly supported

the netting relief provided by the

proposed regulations. Accordingly, the

final regulations are substantially

unchanged from the proposed

regulations.

The proposed regulations provide that

the regulations will be effective for

conversion transactions entered into on

or after the date of filing of final

regulations with the Federal Register.

Several commenters requested that the

regulations also apply to conversion

transactions entered into prior to the

filing date. In response to these

comments, the final regulations provide

for application of the regulations to any

conversion transaction that is

outstanding on December 21, 1995,

provided that all the positions which

are part of the conversion transaction

are identified under § 1.1258–1(b)(2)

before the close of business on February

20, 1996. The final regulations also

provide a transition rule for the sameday identification requirement that

allows taxpayers to identify conversion

transactions entered into prior to

February 20, 1996, at any time on or

before February 20, 1996.

Several commenters criticized the

examples for failing to adjust the

applicable imputed income amount

(AIIA) under section 1258(b) for interest

and dividends received. The scope of

these regulations, however, is limited to

netting relief. The IRS is still studying

various situations to determine the

extent to which it is appropriate to

reduce the AIIA by reason of amounts

capitalized under section 263(g),

ordinary income received, or otherwise.

Accordingly, Example 3 has been

deleted and Examples 1 and 2 have been

clarified to eliminate any implication on

this issue.

One commenter requested that the

identification requirement be eliminated

as impractical, unnecessary, and a trap

for the unwary. This same-day

identification requirement is similar to

identification requirements under

sections 475 and 1221. Identification of

all the positions of a conversion

transaction will aid examiners

attempting to determine whether

conversion transactions are present and

will prevent mismatching of those

positions by both taxpayers and agents.

The final regulations retain the sameday identification requirement but

provide a transition rule.