Part I. Rulings — Internal Revenue Bulletin 1996-24

diately before the distribution, or (b) subject to compliance with certain conditions not relevant to the facts of this ruling, an amount of stock constituting control of such a corporation, (2) the active-trade-or-business requirements of § 355(b) are met, and (3) the transaction is not used principally as a device to distribute earnings and profits, no gain or loss will be recognized to (and no amount will be includible in the income of) such shareholders on the receipt of such stock.

Section 355(c) provides, in effect, that no gain or loss shall be recognized to a corporation on a distribution, to which § 355 applies, of stock in the controlled corporation and that § 311 shall not apply to any such distribution.

Commissioner v. Court Holding Co., 324 U.S. 331 (1945), holds that a sale of property by the shareholders of a corporation after receipt of the property as a liquidating distribution was taxable to the corporation when the corporation had in fact conducted all the negotiations and the terms of the sale had been agreed upon prior to the distribution of the property. However, United States v. Cumberland Public Service Co., 338 U.S. 451 (1950), holds that a sale of assets by the shareholders after a distribution of the assets by the corporation pursuant to a liquidation was not taxable to the corporation. This latter decision was based on the finding of fact by the trial court to the effect that the corporation had rejected an offer to sell the property and the negotiations had been carried on by the shareholders after receipt of the property in liquidation.

In Court Holding, the Supreme Court recognized that ‘‘[t]he incidence of taxation depends upon the substance of a transaction.... [T]he transaction must be viewed as a whole, and each step, from the commencement of negotiations to the consummation of the sale, is relevant. A sale by one person cannot be transformed for tax purposes into a sale by another by using the latter as a conduit through which to pass title.’’ 324 U.S. 331, 334.

If the C stock had, in form, been exchanged by the D shareholders for Y stock under circumstances in which D had, in substance, made the exchange of the C stock, D would be treated as having distributed an amount of stock in Y that did not constitute control of Y .

Section 42.—Low-Income Housing Credit

The adjusted applicable federal short-term, mid-term, and long-term rates are set forth for the month of June 1996. See Rev. Rul. 96–27, page 9.

Section 280G.—Golden Parachute Payments

Federal short-term, mid-term, and long-term rates are set forth for the month of June 1996. See Rev. Rul. 96–27, page 9.

Section 355.—Distribution of Stock and Securities of a Controlled Corporation

26 CFR 1.355–2: Limitations.

The revenue ruling holds that the form of the transaction, consisting of the distribution by a parent corporation of the stock of a subsidiary to its shareholders followed by a merger of the former subsidiary into an unrelated corporation, reflects its substance, determined on the basis of all of the relevant facts and circumstances, and is respected for federal income tax purposes. See Rev. Rul. 96–30, on this page.

Spin-off of subsidiary, followed by its merger with unrelated corporation. The form of the transaction, consisting of the distribution by a parent corporation of the stock of a subsidiary to its shareholders followed by a merger of the former subsidiary into an unrelated corporation, reflected its substance, determined on the basis of all of the relevant facts and circumstances, and was respected for federal income tax purposes.

Rev. Rul. 96–30

ISSUE

If, under the facts below, a corporation distributes the stock of its wholly owned subsidiary to its shareholders and soon thereafter, the assets of the former subsidiary are acquired in a merger, is the form of the transaction respected for Federal income tax purposes?

FACTS

D corporation, whose stock is widely held and actively traded, is engaged in

the manufacture and sale of consumer products. C corporation, engaged in the production and distribution of prepared food products, has been a wholly owned subsidiary of D since D purchased the C stock eight years ago. Both D and C have actively conducted their respective businesses for more than five years.

For a valid business purpose, D adopted a plan whereby it distributed, on a pro rata basis to its shareholders, all of the C stock. No stock of D was surrendered.

Soon after the distribution, Y, an unrelated corporation, and C commenced negotiations leading to an agreement and plan of reorganization pursuant to which C was to be merged with and into Y . Pursuant to the agreement, the C stock would be converted into Y stock representing 25 percent of the outstanding stock of Y . Under applicable state law, the merger could not be consummated without the approval of the shareholders of C, and the agreement and plan of reorganization provided that such approval was a condition precedent to the merger. At the time of the distribution of the C stock to the D shareholders, there had been no negotiations or agreements relating to the transaction involving C and Y, although an acquisition of C was a possibility recognized by the management of D and C at such time.

The plan of reorganization was submitted to the C shareholders after it was approved by the directors of C in accordance with applicable state law. As a legal and practical matter, the C shareholders were free to vote their C stock for or against the merger. The C shareholders approved the merger at a meeting of the shareholders that had been specifically called for such purpose. C then merged with and into Y and the C stock was converted into Y stock in accordance with the plan. The merger satisfies all of the requirements of a reorganization under § 368(a)(1)(A).

LAW AND ANALYSIS

Section 355(a) of the Internal Revenue Code provides, in part, that where (1) a corporation distributes to its shareholders, with respect to its stock, either (a) all of the stock of a corporation which it controls imme

As a result, one of the requirements of § 355 would not have been met. The determination of the substance of the transaction, i.e., which party ( D or the shareholders of D ) had, in substance, disposed of the C stock for Federal income tax purposes is based on all of the relevant facts and circumstances.

In this case, the form of the transaction will be respected for Federal income tax purposes. At the time of the distribution of the C stock by D, there had been no negotiations regarding the acquisition of C by Y, and the only action taken by D with respect to the transaction was that the directors of D had authorized the distribution of the C stock to the shareholders of D . The C shareholders voted on the merger with Y after the distribution and were free to vote their stock for or against the merger. Based on all of the facts and circumstances, the substance of the transaction is a distribution of the C stock by D with respect to its stock followed by the exchange of the C stock by its shareholders for Y stock pursuant to the merger.

HOLDING

The form of the transaction, consisting of the distribution by D of the C stock to the D shareholders followed by the exchange of the C stock by the D shareholders for Y stock pursuant to the merger of C into Y, reflects its substance and will be respected for Federal income tax purposes.

EFFECT ON OTHER REVENUE RULINGS

Rev. Rul. 75–406 is modified.

APPLICATION OF SECTION 7805(b)

The Service will consider the application of § 7805(b) on a case-bycase basis.

FURTHER INFORMATION

For further information regarding this revenue ruling contact Filiz A. Serbes of the Office of Assistant Chief Counsel (Corporate) at (202) 622-7750 (not a toll-free call).

Section 368.—Definitions Relating to Corporate Reorganizations

26 CFR 1.368–1: Purpose and scope of exception of reorganization exchanges.

The revenue ruling provides that under the facts below, the merger of a corporation with one created in another state is a section 368(a)(1)(F) reorganization even though it is a step in a larger transaction that includes a series of steps. See Rev. Rul. 96–29, on this page.

Reorganizations under section 368(a)(1)(F); series of steps in overall plan. The merger of a corporation with one created in another state is a section 368(a)(1)(F) reorganization even though it is a step in a larger transaction that includes a series of steps.

Rev. Rul. 96–29

ISSUE

Do the transactions described below qualify as reorganizations under § 368(a)(1)(F) of the Internal Revenue Code?

FACTS

Situation 1 . Q is a manufacturing corporation all of the common stock of which is owned by twelve individuals. One class of nonvoting preferred stock, representing 40 percent of the aggregate value of Q, is held by a variety of corporate and noncorporate shareholders. Q is incorporated in state M . Pursuant to a plan to raise immediate additional capital and to enhance its ability to raise capital in the future by issuing additional stock, Q proposes to make a public offering of newly issued stock and to cause its stock to become publicly traded. Q entered into an underwriting agreement providing for the public offering and a change in its state of incorporation. The change in the state of incorporation was undertaken, in part, to enable the corporation to avail itself of the advantages that the corporate laws of state N afford to public companies and their officers and directors. In the absence of the public offering, Q would not have changed its state of incorporation. Pursuant to the underwriting agreement, Q changed its place of incorporation by merging with and into R, a newly organized corporation incorporated in state N . The shares

of Q stock were converted into the right to receive an identical number of shares of R stock. Immediately thereafter, R sold additional shares of its stock to the public and redeemed all of the outstanding shares of nonvoting preferred stock. The number of new shares sold was equal to 60 percent of all the outstanding R stock following the sale and redemption.

Situation 2 . W, a state M corporation, is a manufacturing corporation all of the stock of which is owned by two individuals. W conducted its business through several wholly owned subsidiaries. The management of W determined that it would be in the best interest of W to acquire the business of Z, an unrelated corporation, and combine it with the business of Y, one of its subsidiaries, and to change the state of incorporation of W . In order to accomplish these objectives, and pursuant to an overall plan, W entered into a plan and agreement of merger with Y and Z . In accordance with the agreement, Z merged with and into Y pursuant to the law of state M, with the former Z shareholders receiving shares of newly issued W preferred stock in exchange for their shares of Z stock. Immediately following the acquisition of Z, W changed its place of organization by merging with and into N, a newly organized corporation incorporated in state R . Upon W ’s change of place of organization, the holders of W common and preferred stock surrendered their W stock in exchange for identical N common and preferred stock, respectively.

LAW AND ANALYSIS

Section 368(a)(1)(F) provides that a reorganization includes a mere change in identity, form, or place of organization of one corporation, however effected. This provision was amended by the Tax Equity and Fiscal Responsibility Act of 1982, Pub. L. No. 97– 248, in order to limit its application to one corporation. Certain limitations contained in § 381(b), including those precluding the corporation acquiring property in a reorganization from carrying back a net operating loss or a net capital loss for a taxable year ending after the date of transfer to a taxable year of the transferor, do not apply to reorganizations described in § 368(a)(1)(F) ‘‘in recognition of the intended scope of such reorganizations as em

transaction doctrine in other contexts, Rev. Rul. 79–250 is modified.

FURTHER INFORMATION

For further information regarding this revenue ruling contact Marnie Rapaport of the Office of Assistant Chief Counsel (Corporate) at (202) 622-7550 (not a toll-free call).

Section 382.—Limitation on Net Operating Loss Carryforwards and Certain Built-In Losses Following Ownership Change

The adjusted federal long-term rate is set forth for the month of June 1996. See Rev. Rul. 96– 27, page 9.

Section 412.—Minimum Funding Standards

The adjusted applicable federal short-term, mid-term, and long-term rates are set forth for the month of June 1996. See Rev. Rul. 96–27, page 9.

Section 467.—Certain Payments for the Use of Property or Services

The adjusted applicable federal short-term, mid-term, and long-term rates are set forth for the month of June 1996. See Rev. Rul. 96–27, page 9.

Section 468.—Special Rules for Mining and Solid Waste Reclamation and Closing Costs

The adjusted applicable federal short-term, mid-term, and long-term rates are set forth for the month of June 1996. See Rev. Rul. 96–27, page 9.

Section 482.—Allocation of Income and Deductions Among Taxpayers

26 CFR 1.482–7: Sharing of costs.

T.D. 8670

DEPARTMENT OF THE TREASURY Internal Revenue Service 26 CFR Part 1

Revision of Section 482 Cost Sharing Regulations

AGENCY: Internal Revenue Service (IRS), Treasury.

bracing only formal changes in a single operating corporation.’’ H.R. Rep. No. 760, 97th Cong., 2d Sess. 540, 541 (1982). Although a change in the place of organization usually must be effected through the merger of one corporation into another, such a transaction qualifies as a reorganization under § 368(a)(1)(F) because it involves only one operating corporation. The 1982 amendment of § 368(a)(1)(F) thus overruled several cases in which a merger of two or more operating corporations could be treated as a reorganization under § 368(a)(1)(F). See, e.g., Estate of Stauffer v. Commis- sioner, 403 F.2d 611 (9th Cir. 1968); Associated Machine, Inc. v. Commis- sioner, 403 F.2d 622 (9th Cir. 1968); and Davant v. Commissioner, 366 F.2d 874 (5th Cir. 1966). A transaction does not qualify as a reorganization under § 368(a)(1)(F) unless there is no change in existing shareholders or in the assets of the corporation. However, a transaction will not fail to qualify as a reorganization under § 368(a)(1)(F) if dissenters owning fewer than 1 percent of the outstanding shares of the corporation fail to participate in the transaction. Rev. Rul. 66–284, 1966–2 C.B. 115.

The rules applicable to corporate reorganizations as well as other provisions recognize the unique characteristics of reorganizations qualifying under § 368(a)(1)(F). In contrast to other types of reorganizations, which can involve two or more operating corporations, a reorganization of a corporation under § 368(a)(1)(F) is treated for most purposes of the Code as if there had been no change in the corporation and, thus, as if the reorganized corporation is the same entity as the corporation that was in existence prior to the reorganization. See § 381(b); § 1.381(b)–1(a)(2); see also Rev. Rul. 87–110, 1987–2 C.B. 159; Rev. Rul. 80–168, 1980–1 C.B. 178; Rev. Rul. 73–526, 1973–2 C.B. 404; Rev. Rul. 64–250, 1964–2 C.B. 333. In Rev. Rul. 69–516, 1969–2 C.B. 56, the Internal Revenue Service treated as two separate transactions a reorganization under § 368(a)(1)(F) and a reorganization under § 368(a)(1)(C) undertaken as part of the same plan. Specifically, a corporation changed its place of organization by merging into a corporation formed under the laws of another state and, immediately thereafter, it transferred substantially all of its assets in exchange for stock of an

unrelated corporation. The ruling holds that the change in place of organization qualified as a reorganization under § 368(a)(1)(F).

Accordingly, in Situation 1, the reincorporation by Q in state N qualifies as a reorganization under § 368(a)(1)(F) even though it was a step in the transaction in which Q was issuing common stock in a public offering and redeeming stock having a value of 40 percent of the aggregate value of its outstanding stock prior to the offering.

In Situation 2, the reincorporation by W in state N qualifies as a reorganization under § 368(a)(1)(F) even though it was a step in the transaction in which W acquired the business of Z .

HOLDING

On the facts set forth in this ruling, in each of Situations 1 and 2, the reincorporation transaction qualifies as a reorganization under § 368(a)(1)(F), notwithstanding the other transactions effected pursuant to the same plan.

EFFECT ON OTHER REVENUE RULINGS

Rev. Rul. 79–250, 1979–2 C.B. 156, addressed a similar issue on facts that are substantially similar, in all material respects, to those of Situation 2 . The ruling holds that a merger of Z with and into Y in exchange for the stock of W qualifies as a reorganization under § 368(a)(1)(A) by reason of § 368(a)(2)(D), even though W is reincorporated in another state immediately after the merger. The ruling also holds that the reincorporation qualifies as a reorganization under § 368(a)(1)(F). Rev. Rul. 79–250 did not apply the step transaction doctrine in order to combine the two transactions, stating that the merger and the subsequent reincorporation were separate transactions because ‘‘the economic motivation supporting each transaction is sufficiently meaningful on its own account, and is not dependent upon the other transaction for its substantiation.’’

Although the holding of Rev. Rul. 79–250 is correct on the facts presented therein, in order to emphasize that central to the holding in Rev. Rul. 79– 250 is the unique status of reorganizations under § 368(a)(1)(F), and that Rev. Rul. 79–250 is not intended to reflect the application of the step

ACTION: Final regulations.

SUMMARY: This document contains final regulations relating to qualified cost sharing arrangements under section 482 of the Internal Revenue Code. These regulations reflect technical changes to the requirements for qualification as a controlled participant under the final cost sharing regulations published in the Federal Register on December 20, 1995.

DATES: These regulations are effective May 13, 1996.

These regulations are applicable for taxable years beginning on or after January 1, 1996.

FOR FURTHER INFORMATION CONTACT: Lisa Sams of the Office of Associate Chief Counsel (International), IRS (202) 622-3840 (not a tollfree number).

SUPPLEMENTARY INFORMATION:

Background

Section 482 was amended by the Tax Reform Act of 1986, Public Law 99– 514, 100 Stat. 2085, 2561, et. seq. (1986–3 C.B. (Vol. 1) 1, 478). On January 30, 1992, a notice of proposed rulemaking concerning the section 482 amendment in the context of cost sharing was published in the Federal Register (INTL–0372–88, 57 FR 3571). Written comments were received with respect to the notice of proposed rulemaking, and a public hearing was held on August 31, 1992.

On December 20, 1995, final regulations were published in the Federal Register (INTL–0372–88, 60 FR 65553) as Treasury Decision 8632. These final regulations amend the regulations contained in Treasury Decision 8632 by making technical changes to the requirements for qualification as a controlled participant contained in §1.482–7(c).

The agency has decided not to issue a second notice of proposed rulemaking with respect to the modifications to TD 8632 contained in these final regulations. The rules to which the modifications relate (concerning qualification as a controlled participant) were the subject of the notice of proposed rulemaking published on January 30, 1992, and

comments on those rules were received in connection with those proposed regulations. Therefore, a further comment period on these rules is unnecessary. Taxpayers need prompt guidance on how to conform their arrangements to the rules set forth in TD 8632, which is effective for taxable years beginning on or after January 1, 1996, and which provides a one year transition period for amending arrangements. The modifications contained in these final regulations will aid taxpayers in that regard, and any delay caused by a second notice of proposed rulemaking would be impracticable and contrary to the public interest. Unsolicited comment letters were received in connection with TD 8632 and are available for public inspection in the FOIA reading room.

Explanation of Provisions

The purpose of these regulations is to rectify problems in qualifying as a controlled participant caused by the technical requirements of the active conduct rule of §1.482–7(c). This rule provided that a controlled taxpayer may be a controlled participant only if it uses or reasonably expects to use covered intangibles in the active conduct of a trade or business.

Under the 1992 proposed cost sharing regulations, a member of a group of controlled taxpayers could participate in a qualified cost sharing arrangement on behalf of, and could satisfy the active conduct rule based on activities performed by, one or more other members of the group (a cost sharing subgroup). The participating subgroup member would then transfer or license the intangibles developed under the arrangement to the nonparticipating subgroup member(s). The proposed regulations would have measured benefits in such case on the basis of the benefits of the entire subgroup from exploiting the intangibles. TD 8632, in streamlining the participation rules, omitted the subgroup rules. Taxpayers commented that the change would force them to amend existing arrangements to include as a participant every operating company that predictably would be using covered intangibles.

These regulations further streamline the participation rules. The principal reason for the active conduct rule was to ensure that a controlled participant stands to benefit from the use of

covered intangibles in a manner that can be reliably measured. The Treasury and Service have concluded that this purpose can be accomplished without the active conduct rule. No distinction need be made based on the nature of a participant’s use of covered intangibles, so long as its benefits from such use (whether from directly exploiting the intangibles or from transferring or licensing them to others) can be reliably measured.

Accordingly, these regulations eliminate the active conduct rule of §1.482– 7(c) as a requirement for qualification as a controlled participant in a qualified cost sharing arrangement. Section 1.482–7(c)(1) of these regulations substitutes a general rule that a controlled taxpayer may be a controlled participant in a cost sharing arrangement only if it reasonably anticipates that it will derive benefits from the use of covered intangibles. In addition, §1.482–7(f)(3)(ii) provides that if a controlled participant transfers covered intangibles to another controlled taxpayer, the participant’s benefits will be measured with reference to the transferee’s benefits rather than with reference to any consideration paid by the transferee. (This gives rise to results similar to those under the subgroup rules of the proposed regulations by different mechanics.) Finally, §1.482–7(f)(3)(ii) continues to provide that the amount of benefits that each of the controlled participants is reasonably anticipated to derive from covered intangibles must be measured on a basis that is consistent for all such participants.

These changes ensure that a controlled participant must benefit from the arrangement, that the basis for measuring benefits must be consistent for all controlled participants, and that, in the event of intragroup transfers, there will be ‘‘look through’’ treatment for reliably measuring benefits. These rules allow a participant to exploit covered intangibles itself or through transferring or licensing them to others, so long as the benefits to be derived can be consistently and reliably measured for all controlled participants.

These regulations also clarify that the documentation requirements of §1.482–7(j)(2) will satisfy the principal document requirement of §1.6662–6(d)(iii)(B) with respect to a qualified cost sharing arrangement.

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 Small Business Administration for comment on its impact on small business.

Drafting Information

The principal author of these regulations is Lisa Sams, Office of Associate Chief Counsel (International), IRS. However, other personnel from the IRS and Treasury Department participated in their development.

Adoption of Amendments to the Regulations

Accordingly, 26 CFR part 1 is amended as follows:

PART 1—INCOME TAXES

Paragraph 1. The authority for part 1 continues to read in part as follows:

Authority: 26 U.S.C. 7805. * - Par. 2. Section 1.482–0 is amended by revising the entries for §1.482–7(c) and (j) to read as follows:

§1.482–0 Outline of regulations under 482.

- - - - -

§1.482–7 Sharing of costs.

- - - - -

(c) Participant. (1) In general. (2) Treatment of a controlled taxpayer that is not a controlled participant. (i) In general. (ii) Example. (3) Treatment of consolidated group.

- - - - -

(j) Administrative requirements. (1) In general. (2) Documentation. (i) Requirements. (ii) Coordination with penalty regulation. (3) Reporting requirements.

- - - - -

Par. 3. Section 1.482–7 is amended as follows: a. By revising paragraph (c)(1)(i). b. By adding paragraph (c)(1)(iv). c. By removing paragraphs (c)(2) and (c)(3) and redesignating paragraphs (c)(4) and (c)(5) as paragraphs (c)(2) and (c)(3), respectively. d. By revising newly designated paragraph (c)(2)(ii). e. By adding a sentence after the second sentence in paragraph (f)(3)(ii). f. By revising Example 8 of paragraph (f)(3)(iii)(E). g. By redesignating the text of paragraph (j)(2) following the heading as paragraph (j)(2)(i) and adding a heading for newly designated paragraph (j)(2)(i). h. By removing the language ‘‘(j)(2)’’ and adding ‘‘(j)(2)(i)’’ in its place in the first sentence of newly designated paragraph (j)(2)(i). i. By adding a paragraph (j)(2)(ii).

The additions and revisions read as follows:

§1.482–7 Sharing of costs .

- - - - -

(iv) The following example illustrates paragraph (c)(1)(i) of this section:

Example . Foreign Parent (FP) is a foreign corporation engaged in the extraction of a natural resource. FP has a U.S. subsidiary (USS) to which FP sells supplies of this resource for sale in the United States. FP enters into a cost sharing arrangement with USS to develop a new machine to extract the natural resource. The machine uses a new extraction process that will be patented in the United States and in other countries. The cost sharing arrangement provides that USS will receive the rights to use the machine in the extraction of the natural resource in the United States, and FP will receive the rights in the rest

of the world. This resource does not, however, exist in the United States. Despite the fact that USS has received the right to use this process in the United States, USS is not a qualified participant because it will not derive a benefit from the use of the intangible developed under the cost sharing arrangement.

(2) - - (ii) Example . The following example illustrates this paragraph (c)(2):

Example . (i) U.S. Parent (USP), one foreign subsidiary (FS), and a second foreign subsidiary constituting the group’s research arm (R+D) enter into a cost sharing agreement to develop manufacturing intangibles for a new product line A. USP and FS are assigned the exclusive rights to exploit the intangibles respectively in the United States and the rest of the world, where each presently manufactures and sells various existing product lines. R+D is not assigned any rights to exploit the intangibles. R+D’s activity consists solely in carrying out research for the group. It is reliably projected that the shares of reasonably anticipated benefits of USP and FS will be 66 2/3% and 33 1/3%, respectively, and the parties’ agreement provides that USP and FS will reimburse 66 2/3% and 33 1/3%, respectively, of the intangible development costs incurred by R+D with respect to the new intangible.

(ii) R+D does not qualify as a controlled participant within the meaning of paragraph (c) of this section, because it will not derive any benefits from the use of covered intangibles. Therefore, R+D is treated as a service provider for purposes of this section and must receive arm’s length consideration for the assistance it is deemed to provide to USP and FS, under the rules of §1.482–4(f)(3)(iii). Such consideration must be treated as intangible development costs incurred by USP and FS in proportion to their shares of reasonably anticipated benefits ( i.e., 66 2/3% and 33 1/3%, respectively). R+D will not be considered to bear any share of the intangible development costs under the arrangement.

- - - - -

(f) - - (3) - - (ii) - - - If a controlled participant transfers covered intangibles to another controlled taxpayer, such participant’s benefits from the transferred intangibles must be measured by reference to the transferee’s benefits, disregarding any consideration paid by the transferee to the controlled participant (such as a royalty pursuant to a license agreement). * - (iii) - - (E) - -

Example 8 . U.S. Parent (USP), Foreign Subsidiary 1 (FS1) and Foreign Subsidiary 2 (FS2) enter into a cost sharing arrangement to develop computer software that each will market and install on customers’ computer systems. The participants divide costs on the basis of projected sales by USP, FS1, and FS2 of the software in their respective geographic areas. However, FS1 plans not only to sell but also to license the software to unrelated customers, and FS1’s licensing income (which is a percentage of the licensees’ sales) is not counted in the projected benefits. In this case, the basis used for measuring the benefits of each participant is not the most reliable because all of the benefits received by participants are not taken into account. In order to reliably determine benefit shares, FS1’s projected benefits from licensing must be included in the measurement on a basis that is the same as that used to measure its own and the other participants’ projected benefits from sales ( e.g., all participants might measure their benefits on the basis of operating profit).

- - - - -

(j) - - (2) Documentation —(i) Require- ments . * - (ii) Coordination with penalty reg- ulation . The documents described in paragraph (j)(2)(i) of this section will satisfy the principal documents requirement under §1.6662–6(d)(2)(iii)(B)

with respect to a qualified cost sharing arrangement.

- - - - -

Margaret Milner Richardson, Commissioner of Internal Revenue.

Approved May 2, 1996.

Leslie Samuels, Assistant Secretary of the Treasury.

(Filed by the Office of the Federal Register on

May 9, 1996, 8:45 a.m., and published in the issue of the Federal Register for May 13, 1996, 61 F.R. 21955)

Section 483.—Interest on Certain Deferred Payments

The adjusted applicable federal short-term, mid-term, and long-term rates are set forth for the month of June 1996. See Rev. Rul. 96–27, on this page.

Section 807.—Rules for Certain Reserves

The adjusted applicable federal short-term, mid-term, and long-term rates are set forth for the month of June 1996. See Rev. Rul. 96–27, on this page.

Section 846.—Discounted Unpaid Losses Defined

The adjusted applicable federal short-term, mid-term, and long-term rates are set forth for the month of June 1996. See Rev. Rul. 96–27, on this page.

Section 1274.—Determination of Issue Price in the Case of Certain Debt Instruments Issued for Property

(Also Sections 42, 280G, 382, 412, 467, 468, 482, 483, 807, 846, 1288, 7520, 7872.)

Federal rates; adjusted federal rates; adjusted federal long-term rates, and the long-term exempt rate. For purposes of sections 1274, 1288, 382, and other sections of the Code, tables set forth the rates for June 1996.

Rev. Rul. 96–27

This revenue ruling provides various prescribed rates for federal income tax purposes for June 1996 (the current month.) Table 1 contains the short-term, mid-term, and long-term applicable federal rates (AFR) for the current month for purposes of section 1274(d) of the Internal Revenue Code. Table 2 contains the short-term, mid-term, and long-term adjusted applicable federal rates (adjusted AFR) for the current month for purposes of section 1288(b). Table 3 sets forth the adjusted federal long-term rate and the long-term tax-exempt rate described in section 382(f). Table 4 contains the appropriate percentages for determining the low-income housing credit described in section 42(b)(2) for buildings placed in service during the current month. Finally, Table 5 contains the federal rate for determining the present value of an annuity, an interest for life or for a term of years, or a remainder or a reversionary interest for purposes of section 7520.

REV. RUL. 96–27 TABLE 1

Applicable Federal Rates (AFR) for June 1996

Period for Compounding

Annual Semiannual Quarterly Monthly

Short-Term

AFR 5.88% 5.80% 5.76% 5.73% 110 AFR 6.48% 6.38% 6.33% 6.30% 120 AFR 7.08% 6.96% 6.90% 6.86% 130 AFR 7.68% 7.54% 7.47% 7.42% Mid-Term

AFR 6.58% 6.48% 6.43% 6.39% 110 AFR 7.26% 7.13% 7.07% 7.03% 120 AFR 7.93% 7.78% 7.71% 7.66% 130 AFR 8.60% 8.42% 8.33% 8.28% 150 AFR 9.96% 9.72% 9.60% 9.53% 175 AFR 11.66% 11.34% 11.18% 11.08%

Long-Term

AFR 7.04% 6.92% 6.86% 6.82% 110 AFR 7.75% 7.61% 7.54% 7.49% 120 AFR 8.47% 8.30% 8.22% 8.16% 130 AFR 9.20% 9.00% 8.90% 8.84%

REV. RUL. 96–27 TABLE 2

Adjusted AFR for June 1996

Period for Compounding Annual Semiannual Quarterly Monthly Short-term adjusted AFR 3.93% 3.89% 3.87% 3.86% Mid-term adjusted AFR 4.81% 4.75% 4.72% 4.70% Long-term adjusted AFR 5.78% 5.70% 5.66% 5.63%

REV. RUL. 96–27 TABLE 3

Rates Under Section 382 for June 1996

Adjusted federal long-term rate for the current month 5.78%

Long-term tax-exempt rate for ownership changes during the current month (the highest of the adjusted federal long-term rates for the current month and the prior two months.) 5.78%

REV. RUL. 96–27 TABLE 4

Appropriate Percentages Under Section 42(b)(2) for June 1996

Appropriate percentage for the 70% present value low-income housing credit 8.60%

Appropriate percentage for the 30% present value low-income housing credit 3.69%

REV. RUL. 96–27 TABLE 5

Rate Under Section 7520 for June 1996

Applicable federal rate for determining the present value of an annuity, an interest for life or a term of years, or a remainder or reversionary interest 8%

§ 6601 on any large corporate underpayment, the underpayment rate under § 6621(a)(2) is determined by substituting ‘‘5 percentage points’’ for ‘‘3 percentage points.’’ See § 6621(c) and § 301.6621–3 of the Regulations on Procedure and Administration for the definition of a large corporate underpayment and for the rules for determining the applicable rate. Section 6621(c) and § 301.6621–3 are generally effective for periods after December 31, 1990. Section 6621(b)(1) provides that the Secretary will determine the federal short-term rate for the first month in each calendar quarter.

Section 6621(b)(2)(A) provides that the federal short-term rate determined under § 6621(b)(1) for any month applies during the first calendar quarter beginning after such month.

Section 1288.—Treatment of Original Issue Discount on Tax-Exempt Obligations

The adjusted applicable federal short-term, mid-term, and long-term rates are set forth for the month of June 1996. See Rev. Rul. 96–27, page 9.

Section 6621.— Determination of Interest Rate

26 CFR 301.6621–1: Interest rate.

Interest rates; underpayments and overpayments. The rate of interest determined under section 6621 of the Code for the calendar quarter beginning July 1, 1996, is 8 percent for overpayments, 9 percent for underpayments, and 11 percent for large corporate underpayments. The rate of interest paid on the portion of a corporate

overpayment exceeding $10,000 is 6.5 percent.

Rev. Rul. 96–28

Section 6621 of the Internal Revenue Code establishes different rates for interest on tax overpayments and interest on tax underpayments. Under § 6621(a)(1), the overpayment rate is the sum of the federal short-term rate plus 2 percentage points, except the rate for the portion of a corporate overpayment of tax exceeding $10,000 for a taxable period is the sum of the federal short-term rate plus 0.5 of a percentage point for interest computations made after December 31, 1994. Under § 6621(a)(2), the underpayment rate is the sum of the federal short-term rate plus 3 percentage points.

Section 6621(c) provides that for purposes of interest payable under

Section 6621(b)(3) provides that the federal short-term rate for any month is the federal short-term rate determined during such month by the Secretary in accordance with § 1274(d), rounded to the nearest full percent (or, if a multiple of ¹ ⁄2 of 1 percent, the rate is increased to the next highest full percent).

Notice 88–59, 1988–1 C.B. 546, announced that in determining the quarterly interest rates to be used for overpayments and underpayments of tax under § 6621, the Internal Revenue Service will use the federal short-term rate based on daily compounding because that rate is most consistent with § 6621 which, pursuant to § 6622, is subject to daily compounding.

Rounded to the nearest full percent, the federal short-term rate based on daily compounding determined during the month of April 1996 is 6 percent. Accordingly, an overpayment rate of 8 percent and an underpayment rate of 9 percent are established for the calendar quarter beginning July 1, 1996. The overpayment rate for the portion of corporate overpayments exceeding $10,000 for the calendar quarter beginning July 1, 1996, is 6.5 percent. The underpayment rate for large corporate underpayments for the calendar quarter beginning July 1, 1996, is 11 percent. These rates apply to amounts bearing interest during that calendar quarter.

Interest factors for daily compound interest for annual rates of 6.5 percent,

8 percent, 9 percent, and 11 percent are published in Tables 66, 69, 71, and 75 of Rev. Proc. 95–17, 1995–1 C.B. 556, 620, 623, 625, and 629. Annual interest rates to be compounded daily pursuant to § 6622 that apply for prior periods are set forth in the accompanying tables.

DRAFTING INFORMATION

The principal author of this revenue ruling is Marcia Rachy of the Office of Assistant Chief Counsel (Income Tax and Accounting). For further information regarding this revenue ruling, contact Ms. Rachy on (202) 622-4940 (not a toll-free call).

TABLE OF INTEREST RATES

PERIODS BEFORE JUL. 1, 1975 — PERIODS ENDING DEC. 31, 1986

OVERPAYMENTS AND UNDERPAYMENTS

PERIOD RATE

DAILY RATE TABLE

IN 1995–1 C.B.

Before Jul. 1, 1975 6% Table 2, pg. 557 Jul. 1, 1975—Jan. 31, 1976 9% Table 4, pg. 559 Feb. 1, 1976—Jan. 31, 1978 7% Table 3, pg. 558 Feb. 1, 1978—Jan. 31, 1980 6% Table 2, pg. 557 Feb. 1, 1980—Jan. 31, 1982 12% Table 5, pg. 560 Feb. 1, 1982—Dec. 31, 1982 20% Table 6, pg. 560 Jan. 1, 1983—Jun. 30, 1983 16% Table 37, pg. 591 Jul. 1, 1983—Dec. 31, 1983 11% Table 27, pg. 581 Jan. 1, 1984—Jun. 30, 1984 11% Table 75, pg. 629 Jul. 1, 1984—Dec. 31, 1984 11% Table 75, pg. 629 Jan. 1, 1985—Jun. 30, 1985 13% Table 31, pg. 585 Jul. 1, 1985—Dec. 31, 1985 11% Table 27, pg. 581 Jan. 1, 1986—Jun. 30, 1986 10% Table 25 pg. 579 Jul. 1, 1986—Dec. 31, 1986 9% Table 23, pg. 577

TABLE OF INTEREST RATES

FROM JAN. 1, 1987 — PRESENT

OVERPAYMENTS UNDERPAYMENTS

RATE TABLE PG RATE TABLE PG 1995–1 C.B. 1995–1 C.B.

Jan. 1, 1987—Mar. 31, 1987 8% 21 575 9% 23 577 Apr. 1, 1987—Jun. 30, 1987 8% 21 575 9% 23 577 Jul. 1, 1987—Sep. 30, 1987 8% 21 575 9% 23 577 Oct. 1, 1987—Dec. 31, 1987 9% 23 577 10% 25 579 Jan. 1, 1988—Mar. 31, 1988 10% 73 627 11% 75 629 Apr. 1, 1988—Jun. 30, 1988 9% 71 625 10% 73 627 Jul. 1, 1988—Sep. 30, 1988 9% 71 625 10% 73 627 Oct. 1, 1988—Dec. 31, 1988 10% 73 627 11% 75 629 Jan. 1, 1989—Mar. 31, 1989 10% 25 579 11% 27 581 Apr. 1, 1989—Jun. 30, 1989 11% 27 581 12% 29 583 Jul. 1, 1989—Sep. 30, 1989 11% 27 581 12% 29 583 Oct. 1, 1989—Dec. 31, 1989 10% 25 579 11% 27 581 Jan. 1, 1990—Mar. 31, 1990 10% 25 579 11% 27 581 Apr. 1, 1990—Jun. 30, 1990 10% 25 579 11% 27 581 Jul. 1, 1990—Sep. 30, 1990 10% 25 579 11% 27 581 Oct. 1, 1990—Dec. 31, 1990 10% 25 579 11% 27 581 Jan. 1, 1991—Mar. 31, 1991 10% 25 579 11% 27 581 Apr. 1, 1991—Jun. 30, 1991 9% 23 577 10% 25 579 Jul. 1, 1991—Sep. 30, 1991 9% 23 577 10% 25 579 Oct. 1, 1991—Dec. 31, 1991 9% 23 577 10% 25 579 Jan. 1, 1992—Mar. 31, 1992 8% 69 623 9% 71 625 Apr. 1, 1992—Jun. 30, 1992 7% 67 621 8% 69 623 Jul. 1, 1992—Sep. 30, 1992 7% 67 621 8% 69 623 Oct. 1, 1992—Dec. 31, 1992 6% 65 619 7% 67 621 Jan. 1, 1993—Mar. 31, 1993 6% 17 571 7% 19 573 Apr. 1, 1993—Jun. 30, 1993 6% 17 571 7% 19 573 Jul. 1, 1993—Sep. 30, 1993 6% 17 571 7% 19 573 Oct. 1, 1993—Dec. 31, 1993 6% 17 571 7% 19 573 Jan. 1, 1994—Mar. 31, 1994 6% 17 571 7% 19 573 Apr. 1, 1994—Jun. 30, 1994 6% 17 571 7% 19 573 Jul. 1, 1994—Sep. 30, 1994 7% 19 573 8% 21 575 Oct. 1, 1994—Dec. 31, 1994 8% 21 575 9% 23 577 Jan. 1, 1995—Mar. 31, 1995 8% 21 575 9% 23 577 Apr. 1, 1995—Jun. 30, 1995 9% 23 577 10% 25 579 Jul. 1, 1995—Sep. 30, 1995 8% 21 575 9% 23 577 Oct. 1, 1995—Dec. 31, 1995 8% 21 575 9% 23 577 Jan. 1, 1996—Mar. 31, 1996 8% 69 623 9% 71 625 Apr. 1, 1996—Jun. 30, 1996 7% 67 621 8% 69 623 Jul. 1, 1996—Sep. 30, 1996 8% 69 623 9% 71 625

TABLE OF INTEREST RATES FOR LARGE CORPORATE UNDERPAYMENTS

FROM JANUARY 1, 1991 — PRESENT

RATE TABLE PG 1995–1 C.B.

Jan. 1, 1991—Mar. 31, 1991 13% 31 585 Apr. 1, 1991—Jun. 30, 1991 12% 29 583 Jul. 1, 1991—Sep. 30, 1991 12% 29 583 Oct. 1, 1991—Dec. 31, 1991 12% 29 583 Jan. 1, 1992—Mar. 31, 1992 11% 75 629 Apr. 1, 1992—Jun. 30, 1992 10% 73 627 Jul. 1, 1992—Sep. 30, 1992 10% 73 627 Oct. 1, 1992—Dec. 31, 1992 9% 71 625 Jan. 1, 1993—Mar. 31, 1993 9% 23 577 Apr. 1, 1993—Jun. 30, 1993 9% 23 577 Jul. 1, 1993—Sep. 30, 1993 9% 23 577 Oct. 1, 1993—Dec. 31, 1993 9% 23 577 Jan. 1, 1994—Mar. 31, 1994 9% 23 577 Apr. 1, 1994—Jun. 30, 1994 9% 23 577 Jul. 1, 1994—Sep. 30, 1994 10% 25 579 Oct. 1, 1994—Dec. 31, 1994 11% 27 581 Jan. 1, 1995—Mar. 31, 1995 11% 27 581 Apr. 1, 1995—Jun. 30, 1995 12% 29 583 Jul. 1, 1995—Sep. 30, 1995 11% 27 581 Oct. 1, 1995—Dec. 31, 1995 11% 27 581 Jan. 1, 1996—Mar. 31, 1996 11% 75 629 Apr. 1, 1996—Jun. 30, 1996 10% 73 627 Jul. 1, 1996—Sep. 30, 1996 11% 75 629

TABLE OF INTEREST RATES FOR CORPORATE

OVERPAYMENTS EXCEEDING $10,000

FROM JANUARY 1, 1995 — PRESENT

RATE TABLE PG 1995–1 C.B.

Jan. 1, 1995—Mar. 31, 1995 6.5% 18 572 Apr. 1, 1995—Jun. 30, 1995 7.5% 20 574 Jul. 1, 1995—Sep. 30, 1995 6.5% 18 572 Oct. 1, 1995—Dec. 31, 1995 6.5% 18 572 Jan. 1, 1996—Mar. 31, 1996 6.5% 66 620 Apr. 1, 1996—Jun. 30, 1996 5.5% 64 618 Jul. 1, 1996—Sep. 30, 1996 6.5% 66 620

Section 7520.—Valuation Tables

The adjusted applicable federal short-term, mid-term, and long-term rates are set forth for the month of June 1996. See Rev. Rul. 96–27, page 9.

Section 7872.—Treatment of Loans With Below-Market Interest Rates

The adjusted applicable federal short-term, mid-term, and long-term rates are set forth for the month of June 1996. See Rev. Rul. 96–27, page 9.