Part I. Rulings — Internal Revenue Bulletin 2001-23

In King Enterprises, Inc. v. United States, 418 F.2d 511 (Ct. Cl. 1969), as part of an integrated plan, a corporation acquired all of the stock of a target corporation from the target corporation’s shareholders for consideration, in excess of 50 percent of which was acquiring corporation stock, and subsequently merged the target corporation into the acquiring corporation. The court held that, because the merger was the intended result of the stock acquisition, the acquiring corporation’s acquisition of the target corporation qualified as a reorganization under § 368(a)(1)(A).

Section 354(a)(1) provides that no gain or loss will be recognized if stock or securities in a corporation a party to a reorganization are, in pursuance of the plan of reorganization, exchanged solely for stock or securities in another corporation a party to the reorganization.

Section 356(a)(1) provides that, if § 354 would apply to the exchange except for the receipt of money or property other than stock or securities in a corporate party to the reorganization, the recipient shall recognize gain, but in an amount not in excess of the sum of the money and the fair market value of the other property.

Section 1.368–1(c) of the Income Tax Regulations provides that a plan of reorganization must contemplate the bona fide execution of one of the transactions specifically described as a reorganization in § 368(a) and the bona fide consummation of each of the requisite acts under which nonrecognition of gain is claimed. Section 1.368–2(g) provides that the term plan of reorganization is not to be construed as broadening the definition of reorganization as set forth in § 368(a), but is to be taken as limiting the nonrecognition of gain or loss to such exchanges or distributions as are directly a part of the transaction specifically described as a reorganization in § 368(a).

As assumed in the facts, under general principles of tax law, including the step transaction doctrine, the tender offer and the statutory merger in both Situations 1 and 2 are treated as an integrated acquisition by P of all of the T stock. The principles of King Enterprises support the conclusion that, because the tender offer is integrated with the statutory merger in

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 2001. See Rev. Rul. 2001–27, page 1298.

Section 280G.—Golden Parachute Payments

Federal short-term, mid-term, and long-term rates are set forth for the month of June 2001. See Rev. Rul. 2001–27, page 1298.

Section 368.—Definitions Relating to Corporate Reorganizations

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

Two-step stock acquisitions. The ruling holds that certain two-step stock acquisitions comprised of a tender offer and a merger quailify as reorganizations under sections 368(a)(1)(A) and 368(a)(2)(E).

Rev. Rul. 2001–26

ISSUE

On the facts described below, is the control-for-voting-stock requirement of § 368(a)(2)(E) of the Internal Revenue Code satisfied, so that a series of integrated steps constitutes a tax-free reorganization under §§ 368(a)(1)(A) and 368(a)(2)(E) and § 354 or § 356 applies to each exchanging shareholder?

FACTS

Situation 1 . Corporation P and Corporation T are widely held, manufacturing corporations organized under the laws of state A. T has only voting common stock outstanding, none of which is owned by P. P seeks to acquire all of the outstanding stock of T. For valid business reasons, the acquisition will be effected by a tender offer for at least 51 percent of the stock of T, to be acquired solely for P voting stock, followed by a merger of a subsidiary of P into T. P initiates a tender offer for T stock conditioned on the tender of at least 51 percent of the T shares. Pursuant to the

tender offer, P acquires 51 percent of the T stock from T’s shareholders for P voting stock. P forms S and S merges into T under the merger laws of state A. In the statutory merger, P’s S stock is converted into T stock and each of the T shareholders holding the remaining 49 percent of the outstanding T stock exchanges its shares of T stock for a combination of consideration, two-thirds of which is P voting stock and one-third of which is cash. Assume that under general principles of tax law, including the step transaction doctrine, the tender offer and the statutory merger are treated as an integrated acquisition by P of all of the T stock. Also assume that all nonstatutory requirements for a reorganization under §§ 368(a)(1)(A) and 368(a)(2)(E) and all statutory requirements of § 368(a)(2)(E), other than the requirement under § 368(a)(2)(E)(ii) that P acquire control of T in exchange for its voting stock in the transaction, are satisfied.

Situation 2 . The facts are the same as in Situation 1, except that S initiates the tender offer for T stock and, in the tender offer, acquires 51 percent of the T stock for P stock provided by P.

LAW AND ANALYSIS

Section 368(a)(1)(A) states that the term “reorganization” means a statutory merger or consolidation. Section 368(a)(2)(E) provides that a transaction otherwise qualifying under § 368(a) (1)(A) will not be disqualified by reason of the fact that stock of a corporation (the “controlling corporation”) that before the merger was in control of the merged corporation is used in the transaction, if (1) after the transaction, the corporation surviving the merger holds substantially all of its properties and of the properties of the merged corporation (other than stock of the controlling corporation distributed in the transaction), and (2) in the transaction, former shareholders of the surviving corporation exchanged, for an amount of voting stock of the controlling corporation, an amount of stock in the surviving corporation that constitutes control of such corporation (the “control-for-votingstock requirement”). For this purpose, control is defined in § 368(c).

2001–23 I.R.B. 1297 June 4, 2001

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 2001. See Rev. Rul. 2001–27, beginning on this page.

Section 704(c).—Contributed Property

26 CFR 1.704–3: Contributed property.

Can a Qualified Master Feeder-Structure aggregate built-in gains and losses from contributed securities for purposes of making section 704(c) and reverse section 704(c) allocations? See Rev. Proc. 2001–36, page 1326.

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 2001. See Rev. Rul. 2001–27, beginning 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 2001. See Rev. Rul. 2001–27, beginning on this page.

Section 942.—Foreign Trading Gross Receipts

This revenue procedure addresses elections under sections 942 and 943 of the Internal Revenue Code and under section 5(c)(2) of Pub. L. No. 106–519, 114 Stat. 2423. See Rev. Proc. 2001–37, page 1327.

Section 943.—Other Definitions and Special Rules

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

both Situations 1 and 2, the tender offer exchange is treated as part of the statutory merger (hereinafter the “Transaction”) for purposes of the reorganization provisions. Cf . J.E. Seagram Corp. v. Commissioner, 104 T.C. 75 (1995) (treating a tender offer that was an integrated step in a plan that included a forward triangular merger as part of the merger transaction). Consequently, the integrated steps, which result in P acquiring all of the stock of T, must be examined together to determine whether the requirements of § 368(a)(2)(E) are satisfied. Cf . § 1.368–2(j)(3)(i); § 1.368–2(j)(6), Ex. 3 (suggesting that, absent a special exception, steps that are prior to the merger, but are part of the transaction intended to qualify as a reorganization under §§ 368(a)(1)(A) and 368(a)(2)(E), should be considered for purposes of determining whether the control-for-voting-stock requirement is satisfied).

In both situations, in the Transaction, the shareholders of T exchange, for P voting stock, an amount of T stock constituting in excess of 80 percent of the voting stock of T. Therefore, the control-for-voting-stock requirement is satisfied. Accordingly, in both Situations 1 and 2, the Transaction qualifies as a reorganization under §§ 368(a)(1)(A) and 368(a)(2)(E). Under §§ 1.368–1(c) and 1.368–2(g), all of the T shareholders that exchange their T stock for P stock in the Transaction will be treated as exchanging their T stock for P stock in pursuance of a plan of reorganization. Therefore, T shareholders that exchange their T stock only for P stock in the Transaction will recognize no gain or loss under § 354. T shareholders that exchange their T stock for P stock and cash in the Transaction will recognize gain to the extent provided in § 356. In both Situations 1 and 2, none of P, S, or T will recognize any gain or loss in the Transaction, and P’s basis in the T stock will be determined under § 1.358–6(c)(2) by treating P as acquiring all of the T stock in the Transaction and not acquiring any of the T stock before the Transaction.

HOLDING

On the facts set forth in Situations 1 and 2, the control-for-voting-stock requirement is satisfied in the Transaction,

the Transaction constitutes a tax-free reorganization under §§ 368(a)(1)(A) and 368(a)(2)(E), and § 354 or § 356 applies to each exchanging shareholder.

DRAFTING INFORMATION

The principal authors of this revenue ruling are Marnie Rapaport and Joseph M. Calianno of the Office of Associate Chief Counsel (Corporate). For further information regarding this revenue ruling, contact Ms. Rapaport at (202) 622-7550 (not a toll-free call) or Mr. Calianno at (202) 622-7930 (not a toll-free call).

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 2001. See Rev. Rul. 2001–27, beginning on this page.

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 2001. See Rev. Rul. 2001–27, beginning 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 2001. See Rev. Rul. 2001–27, beginning 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 2001. See Rev. Rul. 2001–27, beginning on this page.

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 2001. See Rev. Rul. 2001–27, beginning on this page.

June 4, 2001 1298 2001–23 I.R.B.

the long-term exempt rate. For purposes of sections 382, 1274, 1288, and other sections of the Code, tables set forth the rates for June 2001.

Rev. Rul. 2001–27

This revenue ruling provides various prescribed rates for federal income tax purposes for June 2001 (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 ap propriate 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.

Applicable Federal Rates (AFR) for June 2001

Period for Compounding

Annual Semiannual Quarterly Monthly Short-Term

AFR 4.15% 4.11% 4.09% 4.08% 110% AFR 4.57% 4.52% 4.49% 4.48% 120% AFR 4.99% 4.93% 4.90% 4.88% 130% AFR 5.41% 5.34% 5.30% 5.28%

Mid-Term

AFR 5.02% 4.96% 4.93% 4.91% 110% AFR 5.53% 5.46% 5.42% 5.40% 120% AFR 6.04% 5.95% 5.91% 5.88% 130% AFR 6.55% 6.45% 6.40% 6.36% 150% AFR 7.58% 7.44% 7.37% 7.33% 175% AFR 8.87% 8.68% 8.59% 8.53%

Long-Term

AFR 5.75% 5.67% 5.63% 5.60% 110% AFR 6.34% 6.24% 6.19% 6.16% 120% AFR 6.92% 6.80% 6.74% 6.71% 130% AFR 7.51% 7.37% 7.30% 7.26%

REV. RUL. 2001–27 TABLE 2

Adjusted AFR for June 2001

Period for Compounding

Annual Semiannual Quarterly Monthly Short-term adjusted AFR 3.46% 3.43% 3.42% 3.41%

Mid-term adjusted AFR 3.99% 3.95% 3.93% 3.92%

Long-term adjusted AFR 5.01% 4.95% 4.92% 4.90%

REV. RUL. 2001–27 TABLE 3

Rates Under Section 382 for June 2001

Adjusted federal long-term rate for the current month 5.01%

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.) 5.01%

2001–23 I.R.B. 1299 June 4, 2001

REV. RUL. 2001–27 TABLE 4

Appropriate Percentages Under Section 42(b)(2) for June 2001

Appropriate percentage for the 70% present value low-income housing credit 8.26%

Appropriate percentage for the 30% present value low-income housing credit 3.54%

REV. RUL. 2001–27 TABLE 5

Rate Under Section 7520 for June 2001

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 6.0%

and burdensome. To avoid these adverse consequences, the final regulations in this document remove the consistency requirement and reinstate the provision that was in effect before July 1, 2000.

Effect on Other Documents

Notice 2000–33 (2000–27 I.R.B. 97) is obsolete as of May 18, 2001.

Special Analyses

This rule relieves taxpayer burden by eliminating a requirement with respect to the measurement of taxable fuel. Therefore, it has been determined that notice and public comment are unnecessary and contrary to the public interest. For the same reason, a delayed effective date under 5 U.S.C. 553(d) is not required. Because no preceding notice of proposed rulemaking is required for this Treasury decision and the rule does not impose on small entities a collection of information requirement, the provisions of the Regulatory Flexibility Act do not apply. It also has been determined that this Treasury decision is not a significant regulatory action as defined in Executive Order 12866. Therefore, a regulatory assessment is not required. Pursuant to section 7805(f) of the Code, these final regulations were submitted to the Chief Counsel for Advocacy of the Small Business Administration for comment on their impact on small business.

Drafting Information

The principal author of these regulations is Frank Boland, Office of Associate Chief Counsel (Passthroughs and Special Industries). However, other personnel from the IRS and Treasury Department participated in their development.

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

The adjusted applicable federal short-term, midterm, and long-term rates are set forth for the month of June 2001. See Rev. Rul. 2001–27, page 1298.

Section 4081.—Imposition of Tax

26 CFR 48.4081–8: Taxable fuel; measurement.

T.D. 8945

DEPARTMENT OF THE TREASURY Internal Revenue Service 26 CFR Part 48

Taxable Fuel Measurement

AGENCY: Internal Revenue Service (IRS), Treasury.

ACTION: Final regulations.

SUMMARY: This document contains final regulations relating to the measurement of taxable fuel. The regulations affect certain blenders, enterers, refiners, terminal operators, and throughputters.

DATES: Effective Date : These regulations are effective May 18, 2001.

Applicability Date : These regulations are applicable January 1, 1994.

FOR FURTHER INFORMATION CONTACT: Frank Boland (202) 622-3130 (not a toll-free number).

SUPPLEMENTARY INFORMATION:

Background

Section 4081 imposes a tax on certain removals, entries, and sales of taxable

fuel. Section 4083 provides that taxable fuel means gasoline, diesel fuel, and kerosene.

Before July 1, 2000, regulations provided that gallons of taxable fuel could be measured on the basis of actual volumetric gallons or gallons adjusted to 60 degrees Fahrenheit. However, regulations that were published in the Federal Register on March 31, 2000 (T.D. 8879; 65 FR 17149), provide that beginning July 1, 2000, for each period from July 1 through the following June 30 a person liable for tax on a removal may use only one of the two bases of measurement with respect to taxable fuel removed from any particular terminal, refinery, or blending facility. This rule (the consistency requirement) also applies to taxable entries and sales.

After publication of T.D. 8879 (2000–16 I.R.B. 882), the IRS and the Treasury Department determined that many taxpayers would have had to change their accounting systems to comply with the consistency requirement and would have been unable to complete the necessary changes by July 1, 2000. Accordingly, Notice 2000–33 (2000–27 I.R.B. 97) provided that taxpayers would not be required to comply with the consistency requirement before July 1, 2001. In the meantime, a taxpayer could use either basis of measurement for each taxable removal, entry, or sale of taxable fuel.

Explanation of Provisions

The IRS and the Treasury Department have now determined that the consistency requirement would force many taxpayers to alter current standard business practices and potentially could make routine IRS examinations more time consuming

June 4, 2001 1300 2001–23 I.R.B.

Adoption of Amendments to the Regulations

Accordingly, 26 CFR part 48 is amended as follows:

PART 48–MANUFACTURERS AND RETAILERS EXCISE TAXES

Paragraph 1. The authority citation for part 48 continues to read in part as follows:

Authority: 26 U.S.C. 7805 * * * Par. 2. Section 48.4081–8 is revised to read as follows:

§48.4081–8 Taxable fuel; measurement.

(a) In general . Volumes of taxable fuel may be measured on the basis of actual volumetric gallons or gallons adjusted to 60 degrees Fahrenheit. (b) Effective date . This section is applicable January 1, 1994.

Robert E. Wenzel, Deputy Commissioner

of Internal Revenue.

Approved May 10, 2001.

Mark A. Weinberger, Assistant Secretary of the Treasury.

(Filed by the Office of the Federal Register on May 17, 2001, 8:45 a.m., and published in the issue of the Federal Register for May 18, 2001, 66 F.R. 27597)

Section 4083.—Definitions; Special Rule; Administrative Authority

26 CFR 48.4083–1: Taxable fuel: administrative authority.

Administrative Appeal of Dyed Fuel and Refusal Penalties. This revenue procedure explains how to request an administrative appeal of the penalties imposed by § 6715, relating to the misuse of dyed diesel fuel and kerosene, and §§ 4083(c)(3) and 7342, relating to the refusal to admit entry for purposes of inspecting facilities and equipment and taking and removing fuel samples. See Rev. Proc. 2001–33, page 1322.

Section 6715.—Dyed Fuel Sold for Use or Used in Taxable Use

Section 7520.—Valuation Tables

The adjusted applicable federal short-term, midterm, and long-term rates are set forth for the month of June 2001. See Rev. Rul. 2001–27, page 1298.

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 2001. See Rev. Rul. 2001–27, page 1298.

2001–23 I.R.B. 1301 June 4, 2001