[Federal Register Volume 63, Number 3 (Tuesday, January 6, 1998)]
[Rules and Regulations]
[Pages 411-412]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 98-4]
[[Page 411]]
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DEPARTMENT OF THE TREASURY
Internal Revenue Service
26 CFR Part 1
[TD 8753]
RIN 1545-AV85
Reorganizations; Nonqualified Preferred Stock
AGENCY: Internal Revenue Service (IRS), Treasury.
ACTION: Temporary regulations.
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SUMMARY: This document contains a temporary regulation providing
guidance under section 356(e) of the Internal Revenue Code (Code) on
when nonqualified preferred stock (as defined in section 351(g)(2))
will not be treated as stock or securities for purposes of sections
354, 355, and 356 of the Code. The guidance also addresses the
treatment of the receipt of a right to acquire nonqualified preferred
stock. The temporary regulation provides that in some circumstances the
terms stock and securities will not include nonqualified preferred
stock, or a right to acquire such stock, when received in exchange for
stock or rights to acquire stock. The text of this temporary regulation
also serves as the text of the proposed regulation set forth in the
notice of proposed rulemaking on this subject in the Proposed Rules
section of this issue of the Federal Register.
DATES: This regulation is effective March 9, 1998.
FOR FURTHER INFORMATION CONTACT: Concerning the temporary regulation,
Michael J. Danbury, (202) 622-7750 (not a toll-free number).
SUPPLEMENTARY INFORMATION:
Background and Explanation of Provisions
A. In General
This document contains a temporary regulation under section 356(e)
of the Internal Revenue Code as added by section 1014 of the Taxpayer
Relief Act of 1997 (TRA of 1997), Public Law 105-34. Section 1014 of
the TRA of 1997, enacted on August 5, 1997, amended sections 351, 354,
355, 356, and 1036 of the Code. As amended, sections 354, 355, and 356,
in general, provide that nonqualified preferred stock (as defined in
section 351(g)(2)) received in exchange for stock other than
nonqualified preferred stock will not be treated as stock or securities
but, instead, will be treated as ``other property'' or ``boot.'' As a
result, unless the transition rule of section 1014(f)(2) of TRA of 1997
or another exception applies, the receipt of nonqualified preferred
stock will result in gain recognition.
Section 351(g)(4) provides authority to issue regulations
coordinating the rules for nonqualified preferred stock with other
provisions of the Code. In connection with the issuance of final
regulations treating certain rights to acquire stock as securities
which can be received tax-free under sections 354, 355, and 356 (see
Secs. 1.354-1(e), 1.355-1(c), and 1.356-3(b) (TD 8752) also published
in the Rules and Regulations section of this issue of the Federal
Register), the IRS and Treasury became aware that additional rules were
needed to address the treatment of rights to acquire nonqualified
preferred stock to coordinate with new sections 354(a)(2)(C),
355(a)(3)(D), and 356(e). Accordingly, this temporary regulation
provides that, notwithstanding Secs. 1.354-1(e), 1.355-1(c), and 1.356-
3(b), a right to acquire nonqualified preferred stock received in
exchange for stock other than nonqualified preferred stock (or for a
right to acquire stock other than nonqualified preferred stock) will
not be treated as a security, and that nonqualified preferred stock
received in exchange for stock other than nonqualified preferred stock
(or for a right to acquire stock other than nonqualified preferred
stock) will not be treated as stock or a security.
This regulation does not attempt to address all questions and
issues that may arise regarding the exchange or receipt of nonqualified
preferred stock. The IRS and Treasury recognize that further guidance
is necessary on these matters and intend to provide it in the future.
Accordingly, comments are requested not only on these temporary and
proposed regulations, but also with regard to the types of guidance
needed and other issues under section 351(g) and the related
provisions.
B. Effective Date
Except as provided in section 1014(f)(2) of TRA of 1997, this
temporary regulation applies to nonqualified preferred stock (or a
right to acquire such stock) received in connection with a transaction
occurring on or after March 9, 1998.
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)
does not apply to this regulation. 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 Internal Revenue Code, the notice of proposed
rulemaking accompanying this regulation is being sent to the Small
Business Administration for comment on its impact on small business.
Drafting Information: The principal author of this regulation is
Michael J. Danbury of the Office of Assistant Chief Counsel
(Corporate). However, other personnel from the IRS and Treasury
Department participated in its 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 * * *
Par. 2. Section 1.356-6T is added to read as follows:
Sec. 1.356-6T Rules for treatment of nonqualified preferred stock as
``other property'' (temporary).
(a) In general. For purposes of Secs. 1.354-1(e), 1.355-1(c), and
1.356-3(b), the terms stock and securities do not include--
(1) Nonqualified preferred stock, as defined in section 351(g)(2),
received in exchange for (or in a distribution with respect to) stock,
or a right to acquire stock, other than nonqualified preferred stock;
or
(2) A right to acquire such nonqualified preferred stock, received
in exchange for (or in a distribution with respect to) stock, or a
right to acquire stock, other than nonqualified preferred stock.
(b) Exceptions. The following exceptions apply:
(1) Certain recapitalizations. Paragraph (a) of this section does
not apply in the case of a recapitalization under section 368(a)(1)(E)
of a family-owned corporation as described in section
354(a)(2)(C)(ii)(II).
(2) Transition rule. Paragraph (a) of this section does not apply
to a transaction described in section 1014(f)(2) of the Taxpayer Relief
Act of 1997 (111 Stat. 921).
(c) Effective date. This section applies to nonqualified preferred
stock, or a
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right to acquire such stock, received in connection with a transaction
occurring on or after March 9, 1998.
Michael P. Dolan,
Deputy Commissioner of Internal Revenue.
Approved: December 17, 1997.
Donald C. Lubick,
Acting Assistant Secretary of the Treasury.
[FR Doc. 98-4 Filed 1-5-98; 8:45 am]
BILLING CODE 4830-01-P