[Federal Register Volume 61, Number 247 (Monday, December 23, 1996)]
[Proposed Rules]
[Pages 67508-67510]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 96-32040]
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DEPARTMENT OF THE TREASURY
Internal Revenue Service
26 CFR Part 1
[REG-249819-96]
RIN 1545-AU67
Reorganizations; Receipt of Securities
AGENCY: Internal Revenue Service (IRS), Treasury.
ACTION: Notice of proposed rulemaking and notice of public hearing.
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SUMMARY: This document contains proposed regulations relating to the
receipt, as part of a reorganization, of rights to acquire stock of a
corporation that is a party to the reorganization. This document also
provides notice of a public hearing on these regulations.
DATES: Written comments must be received by March 24, 1997. Requests to
appear and outlines of topics to be discussed at the public hearing
scheduled for March 25, 1997, must be received by March 4, 1997.
ADDRESSES: Send submissions to: CC:DOM:CORP:R [REG-249819-96], room
5228, Internal Revenue Service, POB 7604, Ben Franklin Station,
Washington, DC 20044. In the alternative, submissions may be hand
delivered between the hours of 8 a.m. and 5 p.m. to: CC:DOM:CORP:R
[REG-249819-96], Courier's Desk, Internal Revenue Service, 1111
Constitution Avenue NW., Washington, DC., or, electronically, via the
IRS Internet site at: http://www.irs.ustreas.gov/prod/tax_regs/
comments.html.
The public hearing will be held in the Commissioner's Conference
Room, room 3313, 1111 Constitution Avenue NW., Washington, DC.
FOR FURTHER INFORMATION CONTACT: Concerning the proposed regulations,
Michael J. Danbury, (202) 622-7750; concerning submissions and the
public hearing, Evangelista Lee at (202) 622-7190 (not toll-free
numbers).
SUPPLEMENTARY INFORMATION:
Background
A. General Information
This document contains proposed amendments to the Income Tax
Regulations (26 CFR part 1) under sections 354, 355, and 356 of the
Internal Revenue Code of 1986 (Code), relating to exchanges of stock
and securities in certain reorganizations. In particular, the proposed
regulations address the receipt, as part of a reorganization, of rights
to acquire stock of a corporation that is a party to the
reorganization.
Section 354 generally provides for the nonrecognition of gain or
loss from the exchange of stock or securities in a corporation that is
a party to a reorganization for stock or securities in the same
corporation or in another corporation that is a party to the
reorganization. Gain realized on an exchange of securities is not
recognized provided that the principal amount of the securities
received does not exceed the principal amount of any securities
surrendered pursuant to the plan of reorganization.
Section 355 provides for the nonrecognition of gain or loss upon a
distribution by a corporation with respect to its stock of stock in a
controlled corporation, or an exchange of securities in a controlled
corporation for its securities. As in the case of a transaction
described in section 354, gain realized on an exchange of securities is
not recognized provided that the principal amount of the securities
received does not exceed the principal amount of the securities
surrendered pursuant to the plan of reorganization.
Section 356 provides rules for recognition of gain, but not loss,
if a shareholder or security holder receives nonqualifying property
(i.e., boot) as well as qualifying property in a transaction to which
section 354 or 355 would otherwise apply. In particular, realized gain
is recognized in an amount not in excess of the fair market value of
the excess principal amount of the securities received over the
principal amount of any securities surrendered as part of the plan of
reorganization.
[[Page 67509]]
B. Existing Regulations
Existing regulations under sections 354 and 355 provide that stock
rights and stock warrants are not included in the term ``stock or
securities.'' Prior to the promulgation of these regulations in 1955,
the treatment of such instruments was unclear. Although the Supreme
Court had held that stock warrants do not constitute ``stock'' for
purposes of determining whether a transaction is a reorganization, the
Board of Tax Appeals had held that stock warrants did constitute
``securities'' for purposes of section 112(b)(3) of the 1932 Act (a
predecessor to section 354 of the Code). Compare Helvering v. Southwest
Consolidated Corp., 315 U.S. 194 (1942), with Raymond v. Commissioner,
37 B.T.A. 423 (1938).
Since 1955, courts have avoided concluding whether stock rights or
stock warrants constitute ``securities'' for purposes of sections 354
and 355. See, e.g., Carlberg v. United States, 281 F.2d 507, 509 n.3
(8th Cir. 1960); Bateman v. Commissioner, 40 T.C. 408 (1963); Estate of
Smith v. Commissioner, 63 T.C. 722 (1975).
C. Reasons for Change
A purpose of the reorganization provisions of the Code is to defer
the recognition of gain and loss in certain readjustments of corporate
structure. Generally, the Code extends nonrecognition to an exchange of
stock which effects only a readjustment of continuing interest in
modified corporate form. Although a right to acquire stock is not
stock, the IRS and Treasury believe that it may generally represent a
form of investment in the capital structure of the corporation that
justifies nonrecognition treatment as a security under sections 354 and
355. Other provisions of the Code expressly acknowledge the role that
stock rights play in the capital structure of a corporation. See, e.g.,
sections 317 and 1032. Accordingly, the proposed regulations provide
that for purposes of sections 354 and 355 the term securities includes
``rights to acquire stock'' issued by a corporation that is a party to
a reorganization.
Explanation of Provisions
A. Scope of Proposed Rules
The proposed regulations treat rights to acquire stock issued by a
corporation that is a party to a reorganization as securities of the
corporation. For this purpose, the term ``rights to acquire stock'' of
an issuing corporation has the same meaning as the term has in sections
305(d)(1) and 317(a). It does not include rights exercisable against
persons other than the issuer of the stock, or rights that relate to
property other than stock of the issuer of the rights. As under current
law, a conversion privilege contained in a stock or debt instrument
generally will not be considered a separate property right received as
part of the reorganization. See Rev. Rul. 69-265 (1969-1 C.B. 109).
B. Consequences Upon Receipt of Stock Rights
For purposes of sections 354, 355 and 356, the proposed regulations
treat rights to acquire stock as securities having no principal amount.
As a result, a taxpayer will not be required to recognize any gain
under section 356 upon the receipt of a stock right. This will
generally be the case regardless of whether the taxpayer surrenders
stock, stock rights, or debt securities.
C. Effect on Other Authorities
The proposed rules apply only for the purpose of determining the
amount of gain to be recognized in connection with exchanges occurring
pursuant to transactions otherwise qualifying under section 368 or 355.
They do not address issues concerning the qualification of a
transaction under section 368 or 355. For example, the proposed rules
do not permit rights to acquire stock to be taken into account in
determining continuity of shareholder interest. See Southwest
Consolidated Corp. (stock options are not stock).
The proposed rules have no effect on other Code provisions
governing the treatment of stock options or similar interests for other
purposes. Thus, for example, the treatment of an instrument under these
rules is not relevant in determining whether the holder of the
instrument is treated as holding stock of the issuer for various
purposes. See, e.g., sections 318(a)(4), 382(k)(6), and 1504(a)(5).
Similarly, an instrument treated as a stock right under these rules may
be subject to special rules under other provisions of the Code or
regulations relating to compensation related stock options. See, e.g.,
sections 83 and 421-424 and the regulations thereunder. Nor is any
inference intended as to the treatment of an exchange, substitution, or
assumption of such options under current law.
D. Proposed Effective Dates
The proposed regulations change a long-standing regulatory
position. To afford taxpayers the opportunity to plan for the change,
these regulations are proposed to be effective 60 days after the
Treasury decision adopting these rules as final regulations is filed
with the Office of the Federal Register.
E. Comments Regarding Need for Further Guidance
Comments are requested as to whether additional guidance is needed
with respect to the scope of these regulations and the general
treatment of rights to acquire stock. For example, comments are invited
with respect to: the need for additional guidance or special rules to
address transactions involving exchanges, substitutions, or assumptions
of compensation related stock options; the application of section 306
to the transfer of a right to acquire common stock if the right is
received tax-free pursuant to section 305 or 354; whether section 302
should apply to the cash settlement or repurchase of a stock right, for
example by treating the holder as having purchased the stock pursuant
to the terms of the right and the issuer as having then redeemed that
stock for cash; and any other administrative guidance which may be
helpful in light of these proposed rules, including suggestions as to
existing revenue rulings or revenue procedures that should be modified,
reconsidered, or revoked. Note that comments outside of the scope of
these regulations will be considered as suggestions for other future
guidance.
Special Analyses
It has been determined that this notice of proposed rulemaking 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. Because the
regulation does 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 Code, this notice of proposed
rulemaking will be submitted to the Chief Counsel for Advocacy of the
Small Business Administration for comment on its impact on small
business.
Comments and Public Hearing
Before these proposed regulations are adopted as final regulations,
consideration will be given to any comments submitted timely (in the
manner described under the ADDRESSES caption) to the IRS. All comments
will be available for public inspection and copying.
A public hearing is scheduled for March 25, 1997, at 10 a.m., in
the Commissioner's Conference Room, room
[[Page 67510]]
3313. Because of access restrictions, visitors will not be admitted
beyond the Internal Revenue Building lobby more than 15 minutes before
the hearing starts.
The rules of 26 CFR 601.601(a)(3) apply to the hearing.
Persons who wish to present oral comments at the hearing must
submit an outline of the topics to be discussed by March 4, 1997.
A period of 10 minutes will be allotted to each person for making
comments.
An agenda showing the scheduling of the speakers will be prepared
after the deadline for receiving outlines has passed. Copies of the
agenda will be available free of charge at the hearing.
Drafting Information
The principal author of these regulations is David B. Friedel,
formerly of the Office of Assistant Chief Counsel (Corporate). 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.
Proposed Amendments to the Regulations
Accordingly, 26 CFR part 1 is proposed to be 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 * * *.
Par 2. Section 1.354-1 is amended by revising paragraph (e) to read
as follows:
Sec. 1.354-1 Exchanges of stock and securities in certain
reorganizations.
* * * * *
(e) For purposes of section 354, the term securities includes
rights issued by a party to the reorganization (the issuing
corporation) to acquire its stock. For purposes of this section and
section 356(d)(2)(B), a right to acquire stock has no principal amount.
This paragraph (e) applies to exchanges occurring on or after the day
that is 60 days after the Treasury decision adopting these regulations
is filed with the Federal Register.
Par 3. Section 1.355-1 is amended by removing the last sentence of
paragraph (b) and adding paragraph (c) to read as follows:
Sec. 1.355-1 Distribution of stock and securities of a controlled
corporation.
* * * * *
(c) Stock rights. For purposes of section 355, the term securities
includes rights to acquire the stock of the distributing corporation or
the controlled corporation (the issuing corporation). For purposes of
this section and section 356(d)(2)(B), a right to acquire stock has no
principal amount. This paragraph (c) applies to distributions occurring
on or after the day that is 60 days after the Treasury decision
adopting these regulations is filed with the Federal Register.
Par 4. Section 1.356-3 is amended by:
1. Redesignating existing paragraph (b) as paragraph (c).
2. Adding a new paragraph (b) to read as follows:
Sec. 1.356-3 Rules for treatment of securities as ``other property''.
* * * * *
(b) For purposes of this section, a right to acquire stock of the
issuing corporation is treated as a security with no principal amount.
Thus, such right is not other property when received in a transaction
to which section 356 applies (regardless of whether securities are
surrendered in the exchange). This paragraph (b) applies to
transactions occurring on or after the day that is 60 days after the
Treasury decision adopting these regulations is filed with the Federal
Register.
* * * * *
Margaret Milner Richardson,
Commissioner of Internal Revenue.
[FR Doc. 96-32040 Filed 12-20-96; 8:45 am]
BILLING CODE 4830-01-U
