Federal Register / Vol. 60, No. 245 / Thursday, December 21, 1995 / Rules and Regulations 66077

property interest. Such distributive

share of the gain must be determined

pursuant to the principles of section 704

and the regulations thereunder. For the

rules applicable to partnerships,

interests in which are regularly traded

on an established securities market, see

§ 1.1445–8.

(iii) Disposition by trust or estate—(A)

In general. * * * The fiduciary must

withhold 35 percent (or the highest rate

specified in section 1445(e)(1)) of any

distribution to a foreign beneficiary that

is attributable to the balance in the U.S.

real property interest account on the day

of the distribution. * * * For rules

applicable to trusts, interests in which

are regularly traded on an established

securities market and real estate

investment trusts, see § 1.1445–8.

(B) Example. The following example

illustrates the rules of paragraph

(c)(1)(iii)(A) of this section.

On January 1, 1994, A establishes a

domestic trust (which has as its taxable year,

the calendar year) for the benefit of B, a

nonresident alien, and C, a U.S. citizen. The

trust is not a trust subject to sections 671

through 679. Under the terms of the trust, the

trustee, T, is given discretion to distribute

income and corpus of the trust to provide for

the reasonable needs of B and C. During the

trust’s 1994 tax year, T disposes of three

parcels of vacant land located in the United

States. The following chart illustrates the

computation of the amount subject to

withholding under section 1445 with respect

to distributions made by T to B and C during

1994.

Date Parcel sold Gains or (loss)

realized

Distributions to

C

Distributions to

B (before withholding)

Section 1445

withholding

35% rate

U.S. real property interest

account

1/01/94 .............................. ............................................. ........................ ........................ ........................ ........................ ........................

3/01/94 .............................. Parcel 1 .............................. 140,000 ........................ ........................ ........................ 140,000

3/05/94 .............................. ............................................. ........................ 5,000 10,000 3,500 125,000

3/15/94 .............................. ............................................. ........................ 10,000 5,000 1,750 110,000

5/01/94 .............................. Parcel 2 .............................. 300,000 ........................ ........................ ........................ 410,000

5/15/94 .............................. Parcel 3 .............................. (50,000) ........................ ........................ ........................ 360,000

12/01/94 .............................. ............................................. ........................ 170,000 170,000 59,500 20,000

1/01/95 .............................. ............................................. ........................ ........................ ........................ ........................ ........................

(iv) Disposition by grantor trust. The

trustee or equivalent fiduciary of a trust

that is subject to the provisions of

subpart E of part 1 of subchapter J

(sections 671 through 679) must

withhold a tax equal to 35 percent (or

the highest rate specified in section

1445(e)(1)) of the gain realized from

each disposition of a U.S. real property

interest to the extent such gain is

allocable to a portion of the trust treated

as owned by a foreign person under

subpart E of part 1 of subchapter J.

* * * * *

(3) * * *

(ii) Amount to be withheld. A

partnership or trust electing to withhold

under this § 1.1445–5(c)(3) shall

withhold from each distribution to a

foreign person an amount equal to 35

percent (or the highest rate specified in

section 1445(e)(1)) of the amount

attributable to section 1445(e)(1)

transfers.

* * * * *

(d) Distributions of U.S. real property

interests by foreign corporations—(1) In

general. A foreign corporation that

distributes a U.S. real property interest

must deduct and withhold a tax equal

to 35 percent (or the rate specified in

section 1445(e)(2)) of the amount of gain

recognized by the corporation on the

distribution. * * *

* * * * *

Par. 4. Section 1.1445–8(c)(2)(i) is

revised to read as follows:

§ 1.1445–8 Special rules regarding publicly

traded partnerships, publicly traded trusts

and real estate investment trusts (REITS).

* * * * *

(c) * * *

(2) REITS—(i) In general. The amount

to be withheld with respect to a

distribution by a REIT, under this

section shall be equal to 35 percent (or

the highest rate specified in section

1445(e)(1)) of the amount described in

paragraph (c)(2)(ii) of this section.

* * * * *

Margaret Milner Richardson,

Commissioner of Internal Revenue.

Approved: November 28, 1995.

Leslie Samuels,

Assistant Secretary of the Treasury.

[FR Doc. 95–30871 Filed 12–20–95; 8:45 am]

BILLING CODE 4830–01–U

DEPARTMENT OF THE TREASURY

Internal Revenue Service

26 CFR Part 1

[TD 8648]

RIN 1545–AB21

Controlling corporation’s basis

adjustment in its controlled

corporation’s stock following a

triangular reorganization

AGENCY: Internal Revenue Service (IRS),

Treasury.

ACTION: Final regulations.

SUMMARY: This document contains final

regulations under sections 358, 1032,

and 1502 of the Internal Revenue Code

of 1986. The final regulations provide

rules for adjusting the basis of a

controlling corporation in the stock of a

controlled corporation as the result of

certain triangular reorganizations

involving the stock of the controlling

corporation. They also generally provide

that the use of the controlling

corporation’s stock provided by the

controlling corporation pursuant to the

plan of reorganization is treated as a

disposition of those shares by the

controlling corporation.

DATES: These regulations are effective

December 21, 1995.

For dates of applicability, see the

‘‘Effective Dates’’ section under the

SUPPLEMENTARY INFORMATION portion of

the preamble and the effective date

provisions of the new or revised

regulations.

FOR FURTHER INFORMATION CONTACT: Curt

Cutting, (202) 622–7550 (not a toll-free

number).

SUPPLEMENTARY INFORMATION:

Background

This document contains final

regulations under sections 358, 1032,

and 1502. The proposed regulations

were published in the Federal Register

on December 23, 1994 (59 FR 66280

[CO–993–71], 1995–4 I.R.B. 59 (January

23, 1995)). The IRS received many

comments on the proposed regulations

and held a public hearing on March 31,

1995.

After consideration of the comments

and the statements made at the hearing,

the proposed regulations are adopted as

revised by this Treasury decision.
66078 Federal Register / Vol. 60, No. 245 / Thursday, December 21, 1995 / Rules and Regulations

Overview

The final regulations adopt the overthe-top model contained in the

proposed regulations. Subject to certain

modifications, the model generally

adjusts a controlling corporation’s (P’s)

basis in the stock of its controlled

corporation (S or T) as a result of certain

triangular reorganizations as if P had

acquired the T assets (and any liabilities

assumed or to which the T assets were

subject) directly from T in a transaction

in which P’s basis in the T assets was

determined under section 362(b), and P

then had transferred the T assets (and

liabilities) to S in a transaction in which

P’s basis in the S or T stock was

adjusted under section 358. The

preamble to the proposed regulations

contains a discussion of the justification

for the model. See 59 FR 66280–81.

The final regulations also provide a

special rule that treats S’s use of P’s

stock provided by P pursuant to the

plan of reorganization as a disposition

of those shares by P.

The final regulations apply only for

the purpose of determining P’s basis in

its S or T stock following a transaction

that otherwise qualifies as a

reorganization within the meaning of

section 368. They do not address issues

concerning the qualification of a

transaction as a reorganization.

With the publication of these final

regulations, the IRS announces the

closing of its study project referred to in

§ 5.14 of Rev. Proc. 95–3, 1995–1 C.B.

385, 395.

The significant comments on the

proposed regulations and revisions

made are discussed below.

Summary of Comments and

Explanation of Revisions P’s Basis in T

Stock Owned Before a Reverse

Triangular Merger

The proposed regulations adjusted

basis as a result of a reverse triangular

merger to reflect the amount of T stock

received in the transaction. Comments

on the proposed regulations questioned

how an adjustment based on the amount

of T stock received in the transaction

would apply in the case in which P

owns T stock before the transaction.

In response to these comments, the

final regulations allow P to treat its T

stock as acquired in the transaction or

not, without regard to the form of the

transaction. Thus, P may retain its basis

in the T stock owned before the

transaction, or may determine its basis

in that stock as an allocable portion of

T’s net asset basis. The regulations

require no explicit election. Instead, it is

assumed P will pick the higher basis.

This rule applies only for determining

basis, and not for qualifying the

transaction as a reverse triangular

merger. See Rev. Rul. 74–564, 1974–2

C.B. 124.

The Treasury and the IRS continue to

study issues relating to restructurings

involving related parties and crossownership, and welcome comments and

suggestions on these issues.

Net Negative Adjustment

Under the proposed regulations, P’s

basis adjustment was reduced by the fair

market value of consideration not

provided by P, and by the amount of

liabilities assumed by S or to which T

assets are subject. These reductions did

not result in a net negative basis

adjustment to P’s basis in its S stock

before the transaction. This limitation

did not apply, however, where P and S,

or P and T, as applicable, were members

of a consolidated group following the

triangular reorganization. In the

consolidated context, the negative

adjustments could result in a net

negative adjustment to P’s basis in its S

stock before the transaction, even if the

adjustment resulted in an excess loss

account under § 1.1502–19.

Some comments on the proposed

regulations argued against reducing P’s

basis in its S stock before the transaction

by a net negative adjustment in the

consolidated context. Other comments,

however, agreed that it is appropriate

not to limit the net negative adjustment

in this context.

The Treasury and the IRS continue to

believe that the proposed regulations

reach the correct result. Therefore, the

final regulations adopt the rules as

proposed.

Overlap of Reverse Triangular Merger

and Other Transactions

The proposed regulations provided

that if a transaction qualified as both a

reverse triangular merger and a stock

acquisition under section 368(a)(1)(B), P

adjusted its basis in its T stock based

either on T’s net asset basis or on the

aggregate basis of the T stock

surrendered in the transaction (as if the

transaction were a reorganization under

section 368(a)(1)(B)).

One comment noted that a reverse

triangular merger might overlap with a

section 351 transfer and therefore

requested that this rule also apply to

such a case. The final regulations adopt

this suggestion.

Manner of Making Elections

The proposed and final regulations

provide P with elections for its basis

adjustments when P owns stock of T

and when a reverse triangular merger

also qualifies as a section 351

transaction or B reorganization. In these

situations, P does not have to declare

how it will compute its basis. Rather, P

must simply retain appropriate records.

See § 1.368–3.

Application of Section 1032

The proposed regulations under

section 1032 generally provided that P

stock provided by P to S, or directly to

T or T’s shareholders on behalf of S,

pursuant to the plan of reorganization

would be treated as a disposition by P

of shares of its own stock for T assets

or stock, as applicable. Thus, no gain or

loss was recognized on the use of such

P stock in the transaction. S, however,

recognized gain or loss on its use of P

stock if S did not receive the stock from

P as part of the plan of reorganization.

This rule did not apply in the case of

a reverse triangular merger; section 361

provides nonrecognition treatment for

S’s use of P stock in such a case. To

clarify this treatment, a cross-reference

has been added to the final regulations.

Comments to the proposed

regulations requested that they be

expanded to cover P debt, warrants and

options provided by P to S, or directly

to T or T’s shareholders on behalf of S,

pursuant to the plan of reorganization.

Comments also requested that the rule

be extended to taxable transactions.

The issues raised in these comments

are beyond the scope of this project.

However, the Treasury and the IRS are

studying issues relating to the scope of

section 1032 and welcome comments

and suggestions.

Special Analyses

It has been determined that this

Treasury decision is not a significant

regulatory action as defined in EO

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) and the Regulatory

Flexibility Act (5 U.S.C. chapter 6) do

not apply to these regulations, and,

therefore, a Regulatory Flexibility

Analysis is not required. Pursuant to

section 7805(f) of the Internal Revenue

Code, the notice of proposed rulemaking

preceding these regulations was

submitted to the Small Business

Administration for comment on its

impact on small business.

Effective Dates

Generally, § 1.358–6 applies with

respect to all triangular reorganizations

occurring on or after December 23, 1994,

the day that the proposed regulations

were published in the Federal Register.

As stated in the preamble to the

proposed regulations, any adjustment to
Federal Register / Vol. 60, No. 245 / Thursday, December 21, 1995 / Rules and Regulations 66079

P’s basis in its S or T stock (as

applicable) following a triangular

reorganization occurring before

December 23, 1994, must be consistent

with the adjustment that would be made

if P had made the acquisition directly

and P then transferred the assets to a

controlled subsidiary. However, with

respect to reverse triangular mergers

occurring before December 23, 1994, P

may adjust its basis in its T stock as if

P acquired the stock of the former T

shareholders in a transaction in which

its basis was determined under section

362(b).

Section 1.1032–2 applies with respect

to certain triangular reorganizations

occurring on or after December 23, 1994.

With respect to triangular

reorganizations occurring before

December 23, 1994, see, e.g., § 1.1032–

1 and Rev. Rul. 57–278, 1957–1 C.B.

124.

Section 1.1502–30 applies with

respect to triangular reorganizations

occurring on or after December 21, 1995,

in which P and S, or P and T, as

applicable, are members of a

consolidated group following the

triangular reorganization. For similar

triangular reorganizations occurring

before December 21, 1995, any

adjustments to P’s basis in its S or T

stock (as applicable) must be consistent

with the rules applicable for

nonconsolidated taxpayers, except to

the extent that § 1.1502–31 applies to a

transaction that is a group structure

change.

Drafting Information

The principal authors of these

regulations are Rose Williams and Curt

Cutting, Office of Assistant Chief

Counsel (Corporate). However, other

personnel from the IRS and the Treasury

Department participated in their

development.

List of Subjects for 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 continues to read in part:

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

Section 1.1502–30 also issued under

26 U.S.C. 1502 * * *

§ 1.358–2 [Amended]

Par. 2. Section 1.358–2(d) is removed.

Par. 3. Section 1.358–6 is added to

read as follows:

§ 1.358–6 Stock basis in certain triangular

reorganizations.

(a) Scope. This section provides rules

for computing the basis of a controlling

corporation in the stock of a controlled

corporation as the result of certain

reorganizations involving the stock of

the controlling corporation as described

in paragraph (b) of this section. The

rules of this section are in addition to

rules under other provisions of the

Internal Revenue Code and principles of

law. See, e.g., section 1001 for the

recognition of gain or loss by the

controlled corporation on the exchange

of property for the assets or stock of a

target corporation in a reorganization

described in section 368.

(b) Triangular reorganizations—(1)

Nomenclature. For purposes of this

section—

(i) P is a corporation—

(A) That is a party to a reorganization,

(B) That is in control (within the

meaning of section 368(c)) of another

party to the reorganization, and

(C) Whose stock is transferred

pursuant to the reorganization.

(ii) S is a corporation—

(A) That is a party to the

reorganization, and

(B) That is controlled by P.

(iii) T is a corporation that is another

party to the reorganization.

(2) Definitions of triangular

reorganizations. This section applies to

the following reorganizations (which are

referred to collectively as triangular

reorganizations):

(i) Forward triangular merger. A

forward triangular merger is a statutory

merger of T and S, with S surviving, that

qualifies as a reorganization under

section 368(a)(1)(A) or (G) by reason of

the application of section 368(a)(2)(D).

(ii) Triangular C reorganization. A

triangular C reorganization is an

acquisition by S of substantially all of

T’s assets in exchange for P stock in a

transaction that qualifies as a

reorganization under section

368(a)(1)(C).

(iii) Reverse triangular merger. A

reverse triangular merger is a statutory

merger of S and T, with T surviving,

that qualifies as a reorganization under

section 368(a)(1)(A) by reason of the

application of section 368(a)(2)(E).

(iv) Triangular B reorganization. A

triangular B reorganization is an

acquisition by S of T stock in exchange

for P stock in a transaction that qualifies

as a reorganization under section

368(a)(1)(B).

(c) General rules. Subject to the

special rule provided in paragraph (d) of

this section, P’s basis in the stock of S

or T, as applicable, as a result of a

triangular reorganization, is adjusted

under the following rules—

(1) Forward triangular merger or

triangular C reorganization—(i) In

general. In a forward triangular merger

or a triangular C reorganization, P’s

basis in its S stock is adjusted as if—

(A) P acquired the T assets acquired

by S in the reorganization (and P

assumed any liabilities which S

assumed or to which the T assets

acquired by S were subject) directly

from T in a transaction in which P’s

basis in the T assets was determined

under section 362(b); and

(B) P transferred the T assets (and

liabilities which S assumed or to which

the T assets acquired by S were subject)

to S in a transaction in which P’s basis

in S stock was determined under section

358.

(ii) Limitation. If, in applying section

358, the amount of T liabilities assumed

by S or to which the T assets acquired

by S are subject equals or exceeds T’s

aggregate adjusted basis in its assets, the

amount of the adjustment under

paragraph (c)(1)(i) of this section is zero.

P recognizes no gain under section

357(c) as a result of a triangular

reorganization.

(2) Reverse triangular merger—(i) In

general—(A) Treated as a forward

triangular merger. Except as otherwise

provided in this paragraph (c)(2), P’s

basis in its T stock acquired in a reverse

triangular merger equals its basis in its

S stock immediately before the

transaction adjusted as if T had merged

into S in a forward triangular merger to

which paragraph (c)(1) of this section

applies.

(B) Allocable share. If P acquires less

than all of the T stock in the transaction,

the basis adjustment described in

paragraph (c)(2)(i)(A) of this section is

reduced in proportion to the percentage

of T stock not acquired in the

transaction. The percentage of T stock

not acquired in the transaction is

determined by taking into account the

fair market value of all classes of T

stock.

(C) Special rule if P owns T stock

before the transaction. Solely for

purposes of paragraphs (c)(2)(i)(A) and

(B) of this section, if P owns T stock

before the transaction, P may treat that

stock as acquired in the transaction or

not, without regard to the form of the

transaction.

(ii) Reverse triangular merger that

qualifies as a section 351 transfer or

section 368(a)(1)(B) reorganization.

Notwithstanding paragraph (c)(2)(i) of

this section, if a reorganization qualifies

as both a reverse triangular merger and
66080 Federal Register / Vol. 60, No. 245 / Thursday, December 21, 1995 / Rules and Regulations

as a section 351 transfer or as both a

reverse triangular merger and a

reorganization under section

368(a)(1)(B), P can—

(A) Determine the basis in its T stock

as if paragraph (c)(2)(i) of this section

applies; or

(B) Determine the basis in the T stock

acquired as if P acquired such stock

from the former T shareholders in a

transaction in which P’s basis in the T

stock was determined under section

362(b).

(3) Triangular B reorganization. In a

triangular B reorganization, P’s basis in

its S stock is adjusted as if—

(i) P acquired the T stock acquired by

S in the reorganization directly from the

T shareholders in a transaction in which

P’s basis in the T stock was determined

under section 362(b); and

(ii) P transferred the T stock to S in

a transaction in which P’s basis in its S

stock was determined under section

358.

(4) Examples. The rules of this

paragraph (c) are illustrated by the

following examples. For purposes of

these examples, P, S, and T are domestic

corporations, P and S do not 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,

and the facts set forth the only corporate

activity.

Example 1. Forward triangular merger. (a)

Facts. T has assets with an aggregate basis of

$60 and fair market value of $100 and no

liabilities. Pursuant to a plan, P forms S with

$5 cash (which S retains), and T merges into

S. In the merger, the T shareholders receive

P stock worth $100 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(c)(1), P’s $5 basis in its S stock is adjusted

as if P acquired the T assets acquired by S

in the reorganization directly from T in a

transaction in which P’s basis in the T assets

was determined under section 362(b). Under

section 362(b), P would have an aggregate

basis of $60 in the T assets. P is then treated

as if it transferred the T assets to S in a

transaction in which P’s basis in the S stock

was determined under section 358. Under

section 358, P’s $5 basis in its S stock would

be increased by the $60 basis in the T assets

deemed transferred. Consequently, P has a

$65 basis in its S stock as a result of the

reorganization.

(c) Use of pre-existing S. The facts are the

same as paragraph (a) of this Example 1,

except that S is an operating company with

substantial assets that has been in existence

for several years. P has a $110 basis in the

S stock. Under § 1.358–6(c)(1), P’s $110 basis

in its S stock is increased by the $60 basis

in the T assets deemed transferred.

Consequently, P has a $170 basis in its S

stock as a result of the reorganization.

(d) Mixed consideration. The facts are the

same as paragraph (a) of this Example 1,

except that the T shareholders receive P stock

worth $80 and $20 cash from P. Under

section 358, P’s $5 basis in its S stock is

increased by the $60 basis in the T assets

deemed transferred. Consequently, P has a

$65 basis in its S stock as a result of the

reorganization.

(e) Liabilities. The facts are the same as

paragraph (a) of this Example 1, except that

T’s assets are subject to $50 of liabilities, and

the T shareholders receive $50 of P stock in

exchange for their T stock. Under section

358, P’s basis in its S stock is increased by

the $60 basis in the T assets deemed

transferred and decreased by the $50 of

liabilities to which the T assets acquired by

S are subject. Consequently, P has a net basis

adjustment of $10, and a $15 basis in its S

stock as a result of the reorganization.

(f) Liabilities in excess of basis. The facts

are the same as in paragraph (a) of this

Example 1, except that T’s assets are subject

to liabilities of $90, and the T shareholders

receive $10 of P stock in exchange for their

T stock in the reorganization. Under § 1.358–

6(c)(1)(ii), the adjustment under § 1.358–6(c)

is zero if the amount of the liabilities which

S assumed or to which the T assets acquired

by S are subject exceeds the aggregate

adjusted basis in T’s assets. Consequently, P

has no adjustment in its S stock, and P has

a $5 basis in its S stock as a result of the

reorganization.

Example 2. Reverse triangular merger. (a)

Facts. T has assets with an aggregate basis of

$60 and a fair market value of $100 and no

liabilities. P has a $110 basis in its S stock.

Pursuant to a plan, S merges into T with T

surviving. In the merger, the T shareholders

receive $10 cash from P and P stock worth

$90 in exchange for their T stock. The

transaction is a reorganization to which

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

(b) Basis adjustment. Under § 1.358–

6(c)(2)(i)(A), P’s basis in the T stock acquired

is P’s $110 basis in its S stock before the

transaction, adjusted as if T had merged into

S in a forward triangular merger to which

§ 1.358–6(c)(1) applies. In such a case, P’s

$110 basis in its S stock before the

transaction would have been increased by the

$60 basis of the T assets deemed transferred.

Consequently, P has a $170 basis in its T

stock immediately after the transaction.

(c) Reverse triangular merger that also

qualifies under section 368(a)(1)(B). The facts

relating to T are the same as in paragraph (a)

of this Example 2. P, however, forms S

pursuant to the plan of reorganization. The

T shareholders receive $100 worth of P stock

(and no cash) in exchange for their T stock.

The T shareholders have an aggregate basis

in their T stock of $85 immediately before the

reorganization. The reorganization qualifies

as both a reverse triangular merger and a

reorganization under section 368(a)(1)(B).

Under § 1.358–6(c)(2)(ii), P may determine its

basis in its T stock either as if § 1.358–

6(c)(2)(i) applied to the T stock acquired, or

as if P acquired the T stock from the former

T shareholders in a transaction in which P’s

basis in the T stock was determined under

section 362(b). Accordingly, P may determine

a basis in its T stock of $60 (T’s net asset

basis) or $85 (the T shareholders’ aggregate

basis in the T stock immediately before the

reorganization).

(d) Allocable share in a reverse triangular

merger. The facts are the same as in

paragraph (a) of this Example 2, except that

X, a 10% shareholder of T, does not

participate in the transaction. The remaining

T shareholders receive $10 cash from P and

P stock worth $80 for their T stock. P owns

90% of the T stock after the transaction.

Under 1.358–6(c)(2)(i)(A), P’s basis in its T

stock is P’s $110 basis in its S stock before

the reorganization, adjusted as if T had

merged into S in a forward triangular merger.

In such a case, P’s basis would have been

adjusted by the $60 basis in the T assets

deemed transferred. Under § 1.358–

6(c)(2)(i)(B), however, the basis adjustment

determined under § 1.358–6(c)(2)(i)(A) is

reduced in proportion to the percentage of T

stock not acquired by P in the transaction.

The percentage of T stock not acquired in the

transaction is 10%. Therefore, P reduces its

$60 basis adjustment by 10%, resulting in a

net basis adjustment of $54. Consequently, P

has a $164 basis in its T stock as a result of

the transaction.

(e) P’s ownership of T stock. The facts are

the same as in paragraph (a) of this Example

2, except that P owns 10% of the T stock

before the transaction. P’s basis in that T

stock is $8. All the T shareholders other than

P surrender their T stock for $10 cash from

P and P stock worth $80. P does not

surrender the stock in the transaction. Under

§ 1.358–6(c)(2)(i)(C), P may treat its T stock

owned before the transaction as acquired in

the transaction or not. If P treats that T stock

as acquired in the transaction, P’s basis in

that T stock and the T stock actually acquired

in the transaction equals P’s $110 basis in its

S stock before the transaction, adjusted by

the $60 basis of the T assets deemed

transferred, for a total basis of $170. If P

treats its T stock as not acquired, P retains

its $8 pre-transaction basis in that stock. P’s

basis in its other T shares equals P’s $110

basis in its S stock before the transaction,

adjusted by $54 (the $60 basis in the T assets

deemed transferred, reduced by 10%), for a

total basis of $164 in those shares. See

§ 1.358–6(c)(2)(i)(A) and (B). Consequently, if

P treats its T shares as not acquired, P’s total

basis in all of its T shares is $172.

Example 3. Triangular B reorganization. (a)

Facts. T has assets with a fair market value

of $100 and no liabilities. The T shareholders

have an aggregate basis in their T stock of $85

immediately before the reorganization.

Pursuant to a plan, P forms S with $5 cash

and S acquires all of the T stock in exchange

for $100 of P stock. The transaction is a

reorganization to which section 368(a)(1)(B)

applies.

(b) Basis adjustment. Under § 1.358–

6(c)(3), P adjusts its $5 basis in its S stock

by treating P as if it acquired the T stock

acquired by S in the reorganization directly

from the T shareholders in exchange for the

P stock in a transaction in which P’s basis in

the T stock was determined under section

362(b). Under section 362(b), P would have

an aggregate basis of $85 in the T stock
Federal Register / Vol. 60, No. 245 / Thursday, December 21, 1995 / Rules and Regulations 66081

received by S in the reorganization. P is then

treated as if it transferred the T stock to S in

a transaction in which P’s basis in the S stock

was determined under section 358. Under

section 358, P’s basis in its S stock would be

increased by the $85 basis in the T stock

deemed transferred. Consequently, P has a

$90 basis in its S stock as a result of the

reorganization.

(d) Special rule for consideration not

provided by P—(1) In general. The

amount of P’s adjustment to basis in its

S or T stock, as applicable, described in

paragraph (c) of this section is decreased

by the fair market value of any

consideration (including P stock in

which gain or loss is recognized, see

§ 1.1032–2(c)) that is exchanged in the

reorganization and that is not provided

by P pursuant to the plan of

reorganization. This paragraph (d) does

not apply to the amount of T liabilities

assumed by S or to which the T assets

acquired by S are subject under

paragraph (c)(1) of this section (or

deemed assumed or taken subject to by

S under paragraph (c)(2)(i) of this

section).

(2) Limitation. P makes no adjustment

to basis under this section if the

decrease required under paragraph

(d)(1) of this section equals or exceeds

the amount of the adjustment described

in paragraph (c) of this section.

(3) Example. The rules of this

paragraph (d) are illustrated by the

following example. For purposes of this

example, P, S, AND T are domestic

corporations, P and S do not 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,

and the facts set forth the only corporate

activity.

Example. (a) Facts. T has assets with an

aggregate basis of $60 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

$100 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 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(c)(1), P’s $100 basis in its S stock is

increased by the $60 basis in the T assets

deemed transferred. Under § 1.358–6(d)(1),

the $60 adjustment is decreased by the $30

of cash provided by S in the reorganization.

Consequently, P has a net adjustment of $30

in its S stock, and P has a $130 basis in its

S stock as a result of the reorganization.

(c) Appreciated asset. The facts are the

same as in paragraph (a) of this Example,

except that in the reorganization S provides

an asset with a $20 adjusted basis and $30

fair market value instead of $30 of cash. The

basis results are the same as in paragraph (b)

of this Example. In addition, S recognizes

$10 of gain under section 1001 on its

disposition of the asset in the reorganization.

(d) Depreciated asset. The facts are the

same as in paragraph (c) of this Example,

except that S has a $60 adjusted basis in the

asset. The basis results are the same as in

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

recognizes $30 of loss under section 1001 on

its disposition of the asset in the

reorganization.

(e) P stock. The facts are the same as in

paragraph (a) of this Example, except that in

the reorganization S provides P stock with a

fair market value of $30 instead of $30 of

cash. S acquired the P stock in an unrelated

transaction several years before the

reorganization. S has a $20 adjusted basis in

the P stock. The basis results are the same as

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

S recognizes $10 of gain on its disposition of

the P stock in the reorganization. See

§ 1.1032–2(c).

(e) Cross-reference. For rules relating

to stock basis adjustments made as a

result of a triangular reorganization in

which P and S, or P and T, as

applicable, are, or become, members of

a consolidated group, see § 1.1502–30.

For rules relating to stock basis

adjustments after a group structure

change, see § 1.1502–31.

(f) Effective dates—(1) General rule.

Except as otherwise provided in this

paragraph (f), this section applies to

triangular reorganizations occurring on

or after December 23, 1994.

(2) Special rule for reverse triangular

mergers. For a reverse triangular merger

occurring before December 23, 1994, P

may—

(i) Determine the basis in its T stock

as if paragraph (c)(2)(i) of this section

applied; or

(ii) Determine the basis in its T stock

acquired as if P acquired such stock

from the former T shareholders in a

transaction in which P’s basis in the T

stock was determined under section

362(b).

Par. 4. Section 1.1032–2 is added to

read as follows:

§ 1.1032–2 Disposition by a corporation of

stock of a controlling corporation in certain

triangular reorganizations.

(a) Scope. This section provides rules

for certain triangular reorganizations

described in § 1.358–6(b) when the

acquiring corporation (S) acquires

property or stock of another corporation

(T) in exchange for stock of the

corporation (P) in control of S.

(b) General nonrecognition of gain or

loss. For purposes of § 1.1032–1(a), in

the case of a forward triangular merger,

a triangular C reorganization, or a

triangular B reorganization (as described

in § 1.358–6(b)), P stock provided by P

to S, or directly to T or T’s shareholders

on behalf of S, pursuant to the plan of

reorganization is treated as a disposition

by P of shares of its own stock for T’s

assets or stock, as applicable. For rules

governing the use of P stock in a reverse

triangular merger, see section 361.

(c) Treatment of S. S must recognize

gain or loss on its exchange of P stock

as consideration in a forward triangular

merger, a triangular C reorganization, or

a triangular B reorganization (as

described in § 1.358–6(b)), if 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

or T stock, as applicable. For rules

governing S’s use of P stock in a reverse

triangular merger, see section 361.

(d) Examples. The rules of this section

are illustrated by the following

examples. For purposes of these

examples, P, S, and T are domestic

corporations, P and S do not 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

reorganization provisions, and the facts

set forth the only corporate activity.

Example 1. Forward triangular merger

solely for P stock. (a) Facts. T has assets with

an aggregate basis of $60 and fair market

value of $100 and no liabilities. Pursuant to

a plan, P forms S by transferring $100 of P

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

the T shareholders receive, in exchange for

their T stock, the P stock that P transferred

to S. The transaction is a reorganization to

which sections 368(a)(1)(A) and (a)(2)(D)

apply.

(b) No gain or loss recognized on the use

of P stock. Under paragraph (b) of this

section, the P stock provided by P pursuant

to the plan of reorganization is treated for

purposes of § 1.1032–1(a) as disposed of by

P for the T assets acquired by S in the merger.

Consequently, neither P nor S has taxable

gain or deductible loss on the exchange.

Example 2. Forward triangular merger

solely for P stock provided in part by S. (a)

Facts. T has assets with an aggregate basis of

$60 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. S also owns P stock with

a $20 adjusted basis and $30 fair market

value. S acquired the P stock in an unrelated

transaction several years before the

reorganization. Pursuant to a plan, P transfers

additional P stock worth $70 to S and T

merges into S. In the merger, the T

shareholders receive $100 of P stock ($70 of

P stock provided by P to S as part of the plan

and $30 of P stock held by S previously). The

transaction is a reorganization to which

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

(b) Gain or loss recognized by S on the use

of its P stock. Under paragraph (b) of this

section, the $70 of P stock provided by P

pursuant to the plan of reorganization is

treated as disposed of by P for the T assets
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).