[Federal Register Volume 61, Number 85 (Wednesday, May 1, 1996)]
[Rules and Regulations]
[Pages 19188-19189]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 96-10396]



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DEPARTMENT OF THE TREASURY

Internal Revenue Service

26 CFR Part 1

[TD 8665]
RIN 1545-AT55


Treatment of Underwriters in Section 351 and Section 721 
Transactions

AGENCY: Internal Revenue Service (IRS), Treasury.

ACTION: Final regulations.

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SUMMARY: This document contains final regulations concerning transfers 
of cash to a corporation or a partnership. The final regulations will 
affect taxpayers in transactions under section 351 or section 721 when 
there is an offering of stock or partnership interests through an 
underwriter.

EFFECTIVE DATE: May 1, 1996.

FOR FURTHER INFORMATION CONTACT: Concerning the regulation under 
section 351(a), Susan T. Edlavitch, (202) 622-7750; concerning the 
regulation under section 721(a), James A. Quinn, (202) 622-3060 (not 
toll-free numbers).

SUPPLEMENTARY INFORMATION:

Background

    This document contains final regulations under section 351 and 
section 721. The final regulations provide for the treatment of 
transfers of cash to a corporation or a partnership pursuant to an 
offering of stock or partnership interests through an underwriter.
    Section 351(a) provides that no gain or loss is recognized if 
property is transferred to a corporation by one or more persons solely 
in exchange for stock in the corporation and immediately after the 
exchange the person or persons are in control (as defined in section 
368(c)) of the corporation.
    Section 721(a) provides that no gain or loss is recognized to a 
partnership or to any of its partners in the case of a contribution of 
property to the partnership in exchange for an interest in the 
partnership.
    On August 10, 1995, the IRS published in the Federal Register a 
notice of proposed rulemaking (CO-26-95), adding regulations under 
section 351 and section 721 of the Internal Revenue Code relating to 
transfers of cash to a corporation or a partnership (60 FR 40792). The 
proposed rules were based on the conclusion that Situation 2 of Rev. 
Rul. 78-294 (1978-2 C.B. 141) does not reflect current underwriting 
practices. The proposed rules were also based on the conclusion that 
underwritings of partnership interests should be treated similarly to 
underwritings of stock. The rules, under certain circumstances, 
disregard underwriters of stock and partnership interests for purposes 
of section 351 and section 721.

Public Comments and the Final Regulations

    The IRS received few comments from the public on the proposed 
regulations. The comments received were generally supportive of the 
proposed regulations but sought guidance beyond the intended scope of 
the rules. No public hearing was requested and none was held. After 
consideration of all the comments, the regulations proposed by CO-26-95 
are adopted by this Treasury decision.
    In the notice of proposed rulemaking, the IRS and Treasury invited 
public comment with respect to three issues: (a) Whether the proposed 
rules should apply for all tax purposes; (b) whether the proposed rules 
should be limited to underwriters; and (c) whether the proposed rules 
should be limited to cash transactions. After consideration of

[[Page 19189]]

these issues, the regulations proposed by CO-26-95 are adopted without 
any change in language. However, although the regulations specifically 
concern underwriters, it is intended that its principles could apply 
equally in factually analogous situations. For example, if the 
ownership by other intermediaries in the distribution of stock or 
partnership interests, such as broker-dealers, is transitory, that 
ownership should also be disregarded.

Effect on Other Documents

    The following publication is obsolete as of May 1, 1996: Rev. Rul. 
78-294 (1978-2 C.B. 141).

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 authors of these regulations are Susan T. Edlavitch 
of the Office of Assistant Chief Counsel (Corporate) and Brian J. 
O'Connor, formerly of the Office of Assistant Chief Counsel 
(Passthroughs and Special Industries). 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 
entries in numerical order to read as follows:

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

    Section 1.351-1 also issued under 26 U.S.C. 351. * * *
    Section 1.721-1 also issued under 26 U.S.C. 721. * * *

    Par. 2. In Sec. 1.351-1, paragraph (a)(3) is added to read as 
follows:


Sec. 1.351-1  Transfer to corporation controlled by transferor.

    (a) * * *
    (3) Underwritings of stock--(i) In general. For the purpose of 
section 351, if a person acquires stock of a corporation from an 
underwriter in exchange for cash in a qualified underwriting 
transaction, the person who acquires stock from the underwriter is 
treated as transferring cash directly to the corporation in exchange 
for stock of the corporation and the underwriter is disregarded. A 
qualified underwriting transaction is a transaction in which a 
corporation issues stock for cash in an underwriting in which either 
the underwriter is an agent of the corporation or the underwriter's 
ownership of the stock is transitory.
    (ii) Effective date. This paragraph (a)(3) is effective for 
qualified underwriting transactions occurring on or after May 1, 1996.
* * * * *
    Par. 3. In Sec. 1.721-1, paragraph (c) is added to read as follows:


Sec. 1.721-1  Nonrecognition of gain or loss on contribution.

* * * * *
    (c) Underwritings of partnership interests--(1) In general. For the 
purpose of section 721, if a person acquires a partnership interest 
from an underwriter in exchange for cash in a qualified underwriting 
transaction, the person who acquires the partnership interest is 
treated as transferring cash directly to the partnership in exchange 
for the partnership interest and the underwriter is disregarded. A 
qualified underwriting transaction is a transaction in which a 
partnership issues partnership interests for cash in an underwriting in 
which either the underwriter is an agent of the partnership or the 
underwriter's ownership of the partnership interests is transitory.
    (2) Effective date. This paragraph (c) is effective for qualified 
underwriting transactions occurring on or after May 1, 1996.
Margaret Milner Richardson,
Commissioner of Internal Revenue.

    Approved: March 26, 1996.
Leslie Samuels,
Assistant Secretary of Treasury.
[FR Doc. 96-10396 Filed 4-30-96; 8:45 am]
BILLING CODE 4830-01-P