Part I. Rulings and Decisions Under the Internal Revenue Code of 1986

ment is expected to be administered in a manner that would prevent the tax-free spin-off of a less-than80-percent controlled subsidiary, but would not generally impose additional restrictions on post-distribution restructurings of the controlled corporation if such restrictions would not apply to the distributing corporation.

H.R. Rep. No. 105–220, at 529–30 (1997).

ANALYSIS

The application of Court Holding principles to determine whether the distributed corporation was a controlled corporation immediately before the distribution under § 355(a) imposes a restriction on postdistribution acquisitions or restructurings of a controlled corporation that is inconsistent with § 1012 of the Act. See § 1012(c) of the Act and H.R. Rep. No. 105–220, at 529–30. Accordingly, the Service will not apply Court Holding (or any formulation of the step transaction doctrine) to determine whether the distributed corporation was a controlled corporation immediately before the distribution under § 355(a) solely because of any postdistribution acquisition or restructuring of the distributed corporation, whether prearranged or not. In otherwise applying the step transaction doctrine, the Service will continue to consider all facts and circumstances. See, e.g., Rev. Rul. 63–260, 1963–2 C.B. 147. An independent shareholder vote is only one relevant factor to be considered.

HOLDING

Based on the enactment of § 1012 of the Act, the Service will not apply Court Holding (or any formulation of the step transaction doctrine) to determine whether the distributed corporation was a controlled corporation immediately before the distribution under § 355(a) solely because of any postdistribution acquisition or restructuring of the distributed corporation, whether prearranged or not.

EFFECT ON OTHER REVENUE RULINGS

Rev. Ruls. 96–30 and 75–406 are obsoleted. Rev. Rul. 70–225 is modified to the extent inconsistent with this revenue ruling.

Section 42.—Low-Income Housing Credit

The adjusted applicable federal short-term, midterm, and long-term rates are set forth for the month of June 1998. See Rev. Rul. 98–28, page 5.

Section 280G.—Golden Parachute Payments

Federal short-term, mid-term, and long-term rates are set forth for the month of June 1998. See Rev. Rul. 98–28, page 5.

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

26 CFR 1.355–2: Limitations. (Also § 7805; 301.7805–1.)

Spin-off of subsidiary, followed by its merger with unrelated corporation. Based on the enactment of section 1012 of the Taxpayer Relief Act of 1997, the Service will not apply Court Holding (or any formulation of the step transaction doctrine) to determine whether the distributed corporation was a controlled corporation immediately before the distribution under section 355(a) solely because of any postdistribution acquisition or restructuring of the distributed corporation, whether prearranged or not. Rev. Ruls. 96–30, 1996–1 C.B. 36, and 75–406, 1975–2 C.B. 125, obsoleted. Rev. Rul. 70–225, 1970–1 C.B. 80, modified.

Rev. Rul. 98–27

PURPOSE

This revenue ruling obsoletes Rev. Ruls. 96–30, 1996–1 C.B. 36, and 75– 406, 1975–2 C.B. 125, modified by Rev. Rul. 96–30. This revenue ruling also modifies Rev. Rul. 70–225, 1970–1 C.B. 80.

BACKGROUND

Rev. Rul. 96–30 applies the principles of Commissioner v. Court Holding Co., 324 U.S. 331 (1945), to a distribution of controlled corporation stock by a publicly traded parent, followed by a merger of the

controlled corporation into an unrelated acquiring corporation. The former shareholders of the controlled corporation receive a 25 percent interest in the acquiring corporation. Based on all the facts and circumstances, the ruling concludes that the transaction satisfies the requirements of § 355 of the Internal Revenue Code. Rev. Rul. 96–30 also modifies the factually similar Rev. Rul. 75–406 by eliminating the implication that an independent, postdistribution shareholder vote to approve the acquisition of a controlled corporation is, by itself, enough to prevent application of the step transaction doctrine.

Section 1012(c) of the Taxpayer Relief Act of 1997 (the “Act”), Pub. L. No. 105–34, 111 Stat. 788, 916–17, amended the control requirements of §§ 351 and 368(a)(1)(D) to provide that, generally for transactions seeking qualification after August 5, 1997 under either provision and § 355, the shareholders of the distributing corporation must own stock possessing more than 50 percent of the voting power and more than 50 percent of the total value of the controlled corporation’s stock immediately after the distribution. Sections 351(c) and 368(a)(2)(H). In addition, § 1012(a) of the Act amended § 355 by adding subsection (e), which provides rules for the recognition of gain on certain distributions of stock or securities of a controlled corporation in connection with acquisitions of stock representing a 50 percent or greater interest in the distributing corporation or any controlled corporation. Section 1012(a) of the Act generally applies to distributions after April 16, 1997, pursuant to a plan (or series of related transactions) that involves an acquisition described in § 355(e)(2)(A)(ii) occurring after such date.

The Conference Report accompanying the legislation states, in part, that:

The House bill does not change the present-law requirement under section 355 that the distributing corporation must distribute 80 percent of the voting power and 80 percent of each other class of stock of the controlled corporation. It is expected that this requirement will be applied by the Internal Revenue Service taking account of the provisions of the proposal regarding plans that permit certain types of planned restructuring of the distributing corporation following the distribution, and to treat similar restructurings of the controlled corporation in a similar manner. Thus, the 80-percent control require

June 1, 1998 4 1998–22 I.R.B.

EFFECTIVE DATE

Pursuant to the authority of § 7805(b), this revenue ruling applies to distributions after April 16, 1997. However, this revenue ruling does not apply to a distribution pursuant to a plan (or series of related transactions) that involves an acquisition described in § 355(e)(2)(A)(ii) if the acquisition is pursuant to an agreement that was binding on April 16, 1997 and at all times thereafter, described in a ruling request submitted to the Service on or before that date, or described on or before that date in a public announcement or in a filing with the Securities and Exchange Commission required solely by reason of the acquisition or restructuring. The previous sentence shall not apply to any agreement, ruling request, or public announcement or filing unless it identifies the acquirer of the distributed corporation.

DRAFTING INFORMATION

The principal author of this revenue ruling is Phoebe Bennett of the Office of Assistant Chief Counsel (Corporate). For further information regarding this revenue ruling, contact Ms. Bennett at (202) 6227750 or Brendan P. O’Hara at (202) 6227530 (not toll free calls).

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

The adjusted applicable federal long-term rate is set forth for the month of June 1998. See Rev. Rul. 98–28, on this page.

Section 412.—Minimum Funding Standards

The adjusted applicable federal short-term, midterm, and long-term rates are set forth for the month of June 1998. See Rev. Rul. 98–28, on this page.

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

The adjusted applicable federal short-term, midterm, and long-term rates are set forth for the month of June 1998. See Rev. Rul. 98–28, on this page.

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

The adjusted applicable federal short-term, midterm, and long-term rates are set forth for the month of June 1998. See Rev. Rul. 98–28, on this page.

Section 482.—Allocation of Income and Deductions Among Taxpayers

Federal short-term, mid-term, and long-term rates are set forth for the month of June 1998. See Rev. Rul. 98–28, on this page.

Section 483.—Interest on Certain Deferred Payments

The adjusted applicable federal short-term, midterm, and long-term rates are set forth for the month of June 1998. See Rev. Rul. 98–28, on this page.

Section 642.—Special Rules for Credits and Deductions

Federal short-term, mid-term, and long-term rates are set forth for the month of June 1998. See Rev. Rul. 98–28, on this page.

Section 807.—Rules for Certain Reserves

The adjusted applicable federal short-term, midterm, and long-term rates are set forth for the month of June 1998. See Rev. Rul. 98–28, on this page.

Section 846.—Discounted Unpaid Losses Defined

The adjusted applicable federal short-term, midterm, and long-term rates are set forth for the month of June 1998. See Rev. Rul. 98–28, 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, 642, 807, 846, 1288, 7520, 7872.)

Federal rates; adjusted federal rates; adjusted federal long-term rate, 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 1998.

Rev. Rul. 98–28

This revenue ruling provides various prescribed rates for federal income tax purposes for June 1998 (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.

1998–22 I.R.B. 5 June 1, 1998

REV. RUL. 98–28 TABLE 1

Applicable Federal Rates (AFR) for June 1998

Period for Compounding

Annual Semiannual Quarterly Monthly Short-Term

AFR 5.58% 5.50% 5.46% 5.44% 110% AFR 6.14% 6.05% 6.00% 5.98% 120% AFR 6.71% 6.60% 6.55% 6.51% 130% AFR 7.28% 7.15% 7.09% 7.05%

Mid-Term

AFR 5.77% 5.69% 5.65% 5.62% 110% AFR 6.36% 6.26% 6.21% 6.18% 120% AFR 6.95% 6.83% 6.77% 6.73% 130% AFR 7.54% 7.40% 7.33% 7.29% 150% AFR 8.72% 8.54% 8.45% 8.39% 175% AFR 10.21% 9.96% 9.84% 9.76%

Long-Term

AFR 6.02% 5.93% 5.89% 5.86% 110% AFR 6.63% 6.52% 6.47% 6.43% 120% AFR 7.25% 7.12% 7.06% 7.02% 130% AFR 7.86% 7.71% 7.64% 7.59%

REV. RUL. 98–28 TABLE 2

Adjusted AFR for June 1998

Period for Compounding

Annual Semiannual Quarterly Monthly Short-term adjusted AFR 3.86% 3.82% 3.80% 3.79%

Mid-term adjusted AFR 4.43% 4.38% 4.36% 4.34%

Long-term adjusted AFR 5.15% 5.09% 5.06% 5.04%

REV. RUL. 98–28 TABLE 3

Rates Under Section 382 for June 1998

Adjusted federal long-term rate for the current month 5.15%

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) 5.15%

REV. RUL. 98–28 TABLE 4

Appropriate Percentages Under Section 42(b)(2) for June 1998

Appropriate percentage for the 70% present value low-income housing credit 8.38%

Appropriate percentage for the 30% present value low-income housing credit 3.59%

June 1, 1998 6 1998–22 I.R.B.

REV. RUL. 98–28 TABLE 5

Rate Under Section 7520 for June 1998

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 7.0%

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

The adjusted applicable federal short-term, midterm, and long-term rates are set forth for the month of June 1998. See Rev. Rul. 98–28, page 5.

Section 7520.—Valuation Tables

The adjusted applicable federal short-term, midterm, and long-term rates are set forth for the month of June 1998. See Rev. Rul. 98–28, page 5.

Section 7805.—Rules and Regulations

26 CFR 301.7805–1: Promulgation of regulations.

The revenue ruling provides that, based on the enactment of § 1012 of the Taxpayer Relief Act of 1997, the Service will not apply Court Holding (or any formulation of the step transaction doctrine) to determine whether the distributed corporation was a controlled corporation immediately before the distribution under § 355(a) solely because of any postdistribution acquisition or restructuring of the distributed corporation, whether prearranged or not. Rev. Ruls. 96–30, 1996–1 C.B. 36, and 75–406, 1975–2 C.B. 125, obsoleted. Rev. Rul. 70–225, 1970–1 C.B. 80, modified. See Rev. Rul. 98–28, page 5.

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

The adjusted applicable federal short-term, midterm, and long-term rates are set forth for the month of June 1998. See Rev. Rul. 98–28, page 5.

1998–22 I.R.B. 7 June 1, 1998