19544 Federal Register / Vol. 61, No. 86 / Thursday, May 2, 1996 / Rules and Regulations

PG is currently used in at most 5

percent of semimoist cat foods and at

most 10 percent of cat snacks, which are

similar in texture and content to

semimoist foods. These usage rates

continue to decline.

FDA estimates of 1993 sales of

semimoist cat foods and snacks to U.S.

households are $85 million and $53

million, respectively (Neilsen Marketing

Research data). Those sales representing

semimoist cat foods and cat snacks

which contain PG are approximately

$9,550 million (5 percent of $85 million

plus 10 percent of $53 million). The

effect of this rule would be to replace

these sales with other cat foods and cat

snacks not containing PG. Most of the

industry has already substituted

glycerin for PG in semimoist foods and

snacks. It is likely that the remaining

portion of the industry would make the

substitution of glycerin for PG rather

than surrender their share of the

semimoist cat food and cat snack

market. The cost of this substitution to

the production process is expected to be

small.

Purchases of PG by semimoist cat

food and cat snack manufacturers

represent a very small percentage of

total PG sales, estimated at less than 1

percent. Demand for semimoist cat

foods has declined considerably since

1987. Although demand for cat snacks

continues to grow, its sales are still a

small part of the total pet food industry.

Thus, the effect of this final rule on PG

manufacturers would also be small. The

effects of this final rule on small

businesses would not be substantial.

Although more small sized companies

are involved in manufacturing cat snack

foods than in semimoist foods, their

costs of compliance would not be

significant.

The Regulatory Flexibility Act

requires agencies to analyze regulatory

options that would minimize any

significant impact of a rule on small

entities. For the above reasons, the

agency certifies that this rule will not

have a significant economic impact on

a substantial number of small entities.

Therefore, under the Regulatory

Flexibility Act, no further analysis is

required.

VI. Federalism

FDA has analyzed this rule in

accordance with the principles and

criteria set forth in Executive Order

12612 and has determined that this rule

does not warrant the preparation of a

Federalism Assessment.

List of Subjects

21 CFR Part 500

Animal drugs, Animal feeds, Cancer,

Labeling, Polychlorinated biphenyls

(PCB’s).

21 CFR Parts 582 and 589

Animal feeds, Animal foods, Food

additives.

Therefore, under the Federal Food,

Drug, and Cosmetic Act and under

authority delegated to the Commissioner

of Food and Drugs, 21 CFR parts 500,

582, and 589 are amended as follows:

PART 500—GENERAL

1. The authority citation for 21 CFR

part 500 continues to read as follows:

Authority: Secs. 201, 301, 402, 403, 409,

501, 502, 503, 512, 701 of the Federal Food,

Drug, and Cosmetic Act (21 U.S.C. 321, 331,

342, 343, 348, 351, 352, 353, 360b, 371).

2. New § 500.50 is added to subpart B

to read as follows:

§ 500.50 Propylene glycol in or on cat

food.

The Food and Drug Administration

has determined that propylene glycol in

or on cat food is not generally

recognized as safe and is a food additive

subject to section 409 of the Federal

Food, Drug, and Cosmetic Act (the act).

The Food and Drug Administration also

has determined that this use of

propylene glycol is not prior sanctioned.

PART 582—SUBSTANCES

GENERALLY RECOGNIZED AS SAFE

3. The authority citation for 21 CFR

part 582 continues to read as follows:

Authority: Secs. 201, 402, 409, 701 of the

Federal Food, Drug, and Cosmetic Act (21

U.S.C. 321, 342, 348, 371).

4. Section 582.1666 is amended by

revising paragraph (b) to read as follows:

§ 582.1666 Propylene glycol.

* * * * *

(b) Conditions of use. This substance

is generally recognized as safe (except in

cat food) when used in accordance with

good manufacturing or feeding practice.

PART 589—SUBSTANCES

PROHIBITED FROM USE IN ANIMAL

FOOD OR FEED

5. The authority citation for 21 CFR

part 589 continues to read as follows:

Authority: Secs. 201, 402, 409, 701, of the

Federal Food, Drug, and Cosmetic Act (21

U.S.C. 321, 342, 348, 371).

6. New § 589.1001 is added to subpart

B to read as follows:

§ 589.1001 Propylene glycol in or on cat

food.

The Food and Drug Administration

has determined that propylene glycol in

or on cat food has not been shown by

adequate scientific data to be safe for

use. Use of propylene glycol in or on cat

food causes the feed to be adulterated

and in violation of the Federal Food,

Drug, and Cosmetic Act (the act), in the

absence of a regulation providing for its

safe use as a food additive under section

409 of the act, unless it is subject to an

effective notice of claimed

investigational exemption for a food

additive under § 570.17 of this chapter,

or unless the substance is intended for

use as a new animal drug and is subject

to an approved application under

section 512 of the act or an effective

notice of claimed investigational

exemption for a new animal drug under

part 511 of this chapter.

Dated: April 23, 1996.

William K. Hubbard,

Associate Commissioner for Policy

Coordination.

[FR Doc. 96–10893 Filed 5–1–96; 8:45 am]

BILLING CODE 4160–01–F

DEPARTMENT OF THE TREASURY

Internal Revenue Service

26 CFR Part 1

[TD 8663]

RIN 1545–AT43

Transfers to Investment Companies

AGENCY: Internal Revenue Service (IRS),

Treasury.

ACTION: Final regulations.

SUMMARY: This document contains final

regulations amending regulations under

section 351(e) of the Internal Revenue

Code relating to transfers to investment

companies. The final regulations

concern the treatment of certain

transfers to a controlled corporation.

Generally, the final regulations amend

the regulations to provide when certain

transfers will not cause a diversification

of the transferors’ interests.

EFFEFCITVE DATE: These regulations are

effective May 2, 1996.

FOR FURTHER INFORMATION CONTACT:

Andrew M. Eisenberg, (202) 622–7790

(not a toll-free number).

SUPPLEMENTARY INFORMATION:

1. Background

This document contains final

regulations under section 351. The final

regulations provide for the treatment of
Federal Register / Vol. 61, No. 86 / Thursday, May 2, 1996 / Rules and Regulations 19545

certain transfers to a controlled

corporation. Section 351(a) provides

that no gain or loss will be recognized

if one or more persons transfer property

to a corporation solely in exchange for

stock in the corporation and

immediately after the exchange such

person or persons are in control of the

corporation. Section 351(e)(1) provides

that section 351(a) will not apply to a

transfer of property to an investment

company.

On August 10, 1995, the Federal

Register published a notice of proposed

rulemaking (CO–19–95), amending

regulations under section 351 of the

Internal Revenue Code relating to

transfers of property to an investment

company (60 FR 40794). The proposed

rules were based on the conclusion that

transfers of diversified portfolios are not

inconsistent with the Congressional

purpose of section 351(e)(1).

2. Public Comments and the Final

Regulations

The IRS received comments from the

public on the proposed regulations. No

public hearing was requested and none

was held. The comments received were

generally supportive of the proposed

regulations. After consideration of all

the comments, the regulations proposed

by CO–19–95 are adopted as revised by

this Treasury decision. The principal

comments on the proposed regulations

are discussed below.

Government securities are not treated

as securities of an issuer for purposes of

the 25 and 50-percent tests. Several

commentators suggested that the final

regulations include specific assurance

that Government securities are not

treated as securities of an issuer in

applying the 25 and 50-percent tests

contained in section 368(a)(2)(F)(ii). The

proposed regulations generally adopt

the section 368(a)(2)(F)(ii) tests for

purposes of determining whether a

portfolio of stocks and securities is

diversified. However, the proposed

regulations modify the 25 and 50-

percent tests of section 368(a)(2)(F)(ii)

by including Government securities in

total assets (clause (iv) of section

368(a)(2)(F) excludes Government

securities from total assets for purposes

of the 25 and 50-percent tests in clause

(ii) of section 368(a)(2)(F)). The final

regulations clarify that Government

securities, while included in total

assets, are not treated as securities of an

issuer for purposes of the numerator of

the 25 and 50-percent tests of section

368(a)(2)(F)(ii).

The transfer of a diversified portfolio

of stocks and securities by any

transferor satisfies the modified

diversification test. One commentator

suggested that the final regulations

should clarify that any person, rather

than corporate transferors only, may

satisfy the modified diversification test.

The commentator is concerned that the

use of the section 368(a)(2)(F)(ii) tests,

which are adopted from a provision that

applies only to transfers by

corporations, may imply that the tests as

applied in section 351 are limited to

corporate transferors.

The Treasury and IRS do not intend

to limit application of the final

regulations solely to corporate

transferors. The final regulations

provide that a portfolio will be

diversified if it satisfies the 25 and 50-

percent tests of section 368(a)(2)(F)(ii)

(as modified), rather than section

368(a)(2)(F)(ii), generally.

Transfers of interests in real property

to an investment company. One

commentator suggested that the final

regulations adopt a rule whereby

transfers of real property would not

result in the diversification of the

transferors’ interests if each transferor

transfers a diversified portfolio of real

property to a Real Estate Investment

Trust. The subject of real property

transfers is beyond the scope of these

final regulations.

Retroactive effect of the final

regulations. Several commentators

suggested that the final regulations

include a retroactive effective date. The

final regulations allow taxpayers who

transfer diversified, but nonidentical,

portfolios of stocks and securities before

May 2, 1996, to choose to treat the

transfers consistent with the final

regulations or as transfers resulting in

diversification. However, transfers

completed on or after May 2, 1996, are

subject to the final regulations.

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

also has 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 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 Andrew

M. Eisenberg, Office of Assistant Chief

Counsel (Corporate), IRS. 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.

Adoption of Amendment 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 as follows:

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

Section 1.351–1 also issued under 26

U.S.C. 351. * * * .

Par. 2. Section 1.351–1 is amended

by:

1. Redesignating paragraph (c)(6) as

paragraph (c)(7).

2. Adding new paragraph (c)(6) to

read as follows:

§ 1.351–1 Transfer to corporation controlled

by transferor.

* * * * *

(c) * * *

(6)(i) For purposes of paragraph (c)(5)

of this section, a transfer of stocks and

securities will not be treated as resulting

in a diversification of the transferors’

interests if each transferor transfers a

diversified portfolio of stocks and

securities. For purposes of this

paragraph(c)(6), a portfolio of stocks and

securities is diversified if it satisfies the

25 and 50-percent tests of section

368(a)(2)(F)(ii), applying the relevant

provisions of section 368(a)(2)(F).

However, Government securities are

included in total assets for purposes of

the denominator of the 25 and 50-

percent tests (unless the Government

securities are acquired to meet the 25

and 50-percent tests), but are not treated

as securities of an issuer for purposes of

the numerator of the 25 and 50-percent

tests.

(ii) Paragraph (c)(6)(i) of this section

is effective for transfers completed on or

after May 2, 1996. Transfers of

diversified (within the meaning of

paragraph (c)(6)(i) of this section), but

nonidentical, portfolios of stocks and

securities completed before May 2,

1996, may be treated either—

(A) Consistent with paragraph (c)(6)(i)

of this section; or
19546 Federal Register / Vol. 61, No. 86 / Thursday, May 2, 1996 / Rules and Regulations

(B) As resulting in diversification of

the transferors’ interests.

* * * * *

Margaret Milner Richardson,

Commissioner of Internal Revenue.

Approved: March 6, 1996.

Leslie Samuels,

Assistant Secretary of the Treasury.

[FR Doc. 96–10394 Filed 5–1–96; 8:45 am]

BILLING CODE 4830–01–U

26 CFR Part 1

[TD 8662]

RIN 1545–AQ64

Diversification of Common Trust

Funds

AGENCY: Internal Revenue Service (IRS),

Treasury.

ACTION: Final regulations.

SUMMARY: This document contains final

regulations relating to the

diversification of common trust funds at

the time of a combination or division.

The final regulations affect common

trust funds and their participants.

EFFECTIVE DATE: May 2, 1996.

FOR FURTHER INFORMATION CONTACT:

Steven Schneider, (202) 622–3060 (not a

toll-free number).

SUPPLEMENTARY INFORMATION:

Background

On August 10, 1995, a notice of

proposed rulemaking (PS–29–92) was

published in the Federal Register (60

FR 40796) proposing amendments to the

Income Tax Regulations (26 CFR part 1)

under section 584 of the Internal

Revenue Code. Written comments

responding to this notice were received.

No public hearing was held because no

hearing was requested. After

consideration of all comments received,

the proposed regulations under section

584 are adopted as revised by this

Treasury decision.

Explanation of Provisions

The final regulations modify the

diversification test applied to

combining, dividing, and resulting

common trust funds at the time of a

combination or division. Under the

existing regulations, which incorporate

the diversification test of section

368(a)(2)(F)(ii), Government securities

are excluded in determining total assets.

These final regulations modify the

diversification test so that Government

securities are included in determining

total assets when applying section

368(a)(2)(F)(ii).

This modified diversification test is

the same as that in the final regulations

under section 351(e), which deals with

transfers to investment companies.

These corresponding modifications

ensure that a uniform diversification

test will be applied to common trust

funds and similar investment entities.

The final regulations also update the

regulations under section 584 to

conform to changes in the law.

Changes to the Proposed Regulations in

Response to Comments

I. Clarification That Government

Securities Are Not Treated as Securities

of an Issuer

Two commentators suggested that the

final regulations include specific

assurance that Government securities

are not treated as securities of an issuer

in applying the 25 and 50-percent tests

contained in section 368(a)(2)(F)(ii) to

mergers and divisions of common trust

funds. The proposed regulations

provide that Government securities are

included in total assets in applying the

25 and 50-percent tests to common trust

fund combinations and divisions, but do

not specifically state that Government

securities are not treated as securities of

an issuer. The final regulations clarify

that Government securities, while

included in total assets, are not treated

as securities of an issuer for purposes of

the numerator of the 25 and 50-percent

tests of section 368(a)(2)(F)(ii).

II. Clarification of the Definition of

Government Securities

One commentator suggested that the

regulations broaden the definition of the

term Government securities to include

state and local government obligations.

The final regulations do not adopt the

suggestion.

Effective Date

These regulations apply to

combinations and divisions of common

trust funds completed on or after May

2, 1996.

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 Chief Counsel for

Advocacy of the Small Business

Administration for comment on its

impact on small business.

Drafting Information

The principal author of this regulation

is Brian J. O’Connor, formerly of the

Office of Assistant Chief Counsel

(Passthroughs and Special Industries).

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.

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 as

follows:

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

§ 1.584–2 [Amended]

Par. 2. Section 1.584–2 is amended

by:

1. Removing paragraph (b)(1).

2. Removing the paragraph

designation (b)(2).

Par. 3. Section 1.584–4 is amended

by:

1. Removing paragraphs (a)(1) and

(a)(2).

2. Removing the last sentence in

paragraph (a) and adding 6 sentences in

its place.

3. Adding paragraph (e).

The additions read as follows:

§ 1.584–4 Admission and withdrawal of

participants in the common trust fund.

(a) * * * When a participating interest

is transferred by a bank, or by two or

more banks that are members of the

same affiliated group (within the

meaning of section 1504), as a result of

the combination of two or more

common trust funds or the division of

a single common trust fund, the transfer

to the surviving or divided fund is not

considered to be an admission or a

withdrawal if the combining, dividing,

and resulting common trust funds have

diversified portfolios. For purposes of

this paragraph (a), a common trust fund

has a diversified portfolio if it satisfies

the 25 and 50-percent tests of section

368(a)(2)(F)(ii), applying the relevant

provisions of section 368(a)(2)(F).

However, Government securities are

included in total assets for purposes of

the denominator of the 25 and 50-

percent tests (unless the Government