SECTION 2. BACKGROUND

Section 1504(a)(1) provides that an affiliated group means one or more chains of includible corporations connected through stock ownership with a common parent which is an includible corporation, but only if (A) the common parent owns directly stock meeting the requirements of § 1504(a)(2) in at least one of the includible corporations and (B) stock meeting the requirements of § 1504(a)(2) in each of the includible corporations (other than the common parent) is owned directly by one or more of the other includible corporations. Section 1504(a)(2) imposes two requirements. First, pursuant to § 1504(a)(2)(A), the stock must possess at least 80 percent of the total voting power of the stock of the corporation. Second, pursuant to § 1504(a)(2)(B), the stock must have a value equal to at least 80 percent of the total value of the stock of the corporation (the value requirement).

Section 1504(a)(5)(C) directs the Secretary to prescribe regulations that provide that the value requirement will be treated

as met if the affiliated group, in reliance on a good faith determination of value, treated it as met (the good faith exception). Section 1504(a)(5)(D) directs the Secretary to prescribe regulations that disregard an inadvertent ceasing to meet the value requirement by reason of changes in relative values of different classes of stock (the inadvertence exception). The legislative history of § 1504 reflects that the inadvertence exception should be available only if the changes in relative value are “not large” and are not “intentionally generated.” H.R. Rep. No. 98–861 at 834, 1984–3 C.B. (vol. 2) 87 (1984). Section 1504(a)(5)(C) and (D), therefore, contemplate that affiliation could be treated as continuing, notwithstanding that the value requirement is not satisfied.

The Service and Treasury Department intend to promulgate regulations implementing the provisions of § 1504(a)(5)(C) and (D). This document outlines those circumstances under which the Service will provide relief from the failure to satisfy the value requirement until temporary or final regulations are promulgated or until this notice is revised. It is possible that the standards adopted in such regulations will vary from and, in certain circumstances, be narrower than the interim relief provided in this document.