SECTION 3. INTERIM RELIEF

.01 Scope . Until temporary or final regulations implementing § 1504(a)(5)(C) and (D) are promulgated, or until this notice is revised, the Service will not challenge a consolidated group’s position on a consolidated return that the stock ownership of a “qualifying corporation” satisfies the value requirement for purposes of applying any “value provision” if the consolidated group (including a consolidated group that arises or continues to exist by reason of the relief provided in this notice) satisfies the requirements of either section 3.02 or section 3.03. For purposes of the preceding sentence, a “qualifying corporation” is an includible corporation (within the meaning of § 1504(b) or (c)). In addition, a “value provision” is any provision of the Code and the regulations promulgated thereunder for which ownership of stock, as defined in § 1504, represent

ing 80 percent (or any lesser threshold percentage) of the total value of the stock of the qualifying corporation is relevant. A “value provision” is also any provision of the Code and the regulations promulgated that refers to “affiliated group” as such term is defined in § 1504.

This notice does not require a taxpayer to treat the value requirement as satisfied with respect to a corporation for purposes of any value provision if the requirements of the value provision are not in fact satisfied. This notice does not permit a taxpayer to treat the value requirement as satisfied with respect to a corporation for purposes of some but not all value provisions (see section 3.04(7)).

Finally, the relief provided in this notice extends only to the taxpayer that satisfies the requirements of section 3.02 or section 3.03. For example, assume a consolidated group’s ownership of the stock of a qualifying corporation does not satisfy the value requirement and, consistent with the terms of this notice (because it is entitled to either the good faith or inadvertence exception), the consolidated group takes the position on its consolidated return that its ownership of the stock of the qualifying corporation satisfies the value requirement. If the group sells all of its stock of the qualifying corporation, unless the purchaser of the stock independently satisfies the requirements of section 3.02, an election under § 338(h)(10) may not be made in respect of the stock of the qualifying corporation.

.02 Good Faith Exception . The requirement of this section 3.02 will be satisfied if the consolidated group made a good faith determination that the value requirement was satisfied. The requirement of this section 3.02 will cease to be treated as satisfied immediately before the occurrence of a designated event described in section 3.04, unless the consolidated group makes a good faith determination that, immediately after such designated event, the value requirement is satisfied. If, at any time prior to the occurrence of a designated event, the consolidated group knows or should know that the good faith determination that the value requirement was satisfied was incorrect, the requirement of this section 3.02 nonetheless will continue to be treated as satisfied until immedi

2004-21 I.R.B. 947 May 24, 2004

requirement. The Service and Treasury Department also request comments identifying any special issues that may arise if the good faith and inadvertence exceptions were to apply not only in the consolidated group context, but more broadly in the affiliated group context, and the manner in which those issues should be addressed.

.02 The Good Faith Exception . The Service and Treasury Department believe that, in order to establish that the affiliated group, in reliance on a good faith determination of value, treated the value requirement as satisfied, members of the affiliated group must have filed Federal income tax returns in a manner that is consistent with satisfaction of the value requirement. Consideration is being given to whether evidence, such as a third party appraisal, should be required to establish reliance on a good faith determination of value.

The Service and Treasury Department are also considering whether the good faith exception should be presumptively available if the value of the affiliated group’s ownership of the stock of the corporation does not fall below a requisite percentage that is relatively small. In addition, the Service and Treasury are considering whether to adopt a rule providing that, if the value of the affiliated group’s ownership of stock of the corporation falls below a requisite percentage, the affiliated group’s treatment of the value requirement as satisfied is not based in reliance on a good faith determination of value.

Finally, the Service and Treasury Department are considering whether the good faith exception should be available only if the affiliated group cures the value deficiency within a specified period of time after the deficiency arose, or, alternatively, after becoming aware of the deficiency.

.03 The Inadvertence Exception . The Service and Treasury Department are considering what evidence an affiliated group must produce to establish that the failure to satisfy the value requirement was inadvertent by reason of a change in the relative values of different classes of stock. The Service and Treasury Department are also considering whether the inadvertence exception should be available only if the value deficiency does not exceed a certain percentage.

The Service and Treasury Department are considering whether the inadvertence exception should be available only if the

ately before the occurrence of a designated event described in section 3.04.

.03 Inadvertence exception . The requirement of this section 3.03 will be satisfied if (a) the consolidated group’s ownership of stock of the corporation does not satisfy the value requirement as a result of a change in the relative values of different classes of stock and such change is not attributable to the occurrence of a designated event described in section 3.04, and (b) immediately before such change in relative values, the consolidated group’s ownership of stock of the corporation satisfied the value requirement. The requirement of this section 3.03 will cease to be treated as satisfied immediately before the occurrence of a designated event described in section 3.04.

.04 Designated Events . The following events are designated events:

(1) The corporation issues stock to a person that is not a member of the consolidated group.

(2) The corporation redeems stock owned by a member of the consolidated group, other than in complete liquidation of the corporation.

(3) A member of the consolidated group (directly or indirectly) transfers stock of the corporation to a person that is not a member of the consolidated group.

(4) The corporation after May 6, 2004, distributes with respect to its stock money or other property to a member of the consolidated group or a person related (within the meaning of § 267(b) or § 707(b)) to a member of the consolidated group. However, a transaction that is not in form a distribution with respect to a corporation’s stock (for example, a distribution deemed to occur by reason of the application of § 482) is a designated event only if (a) the corporation accounts for it on its books and records as a transaction with respect to its stock, (b) it involves the transfer of money or other property (including stock of the corporation) by the corporation to a person in satisfaction of the indebtedness of another member of the consolidated group or a person related thereto, or (c) it involves the forgiveness by the corporation of indebtedness of a member of the consolidated group or a person related (within the meaning of § 267(b) or § 707(b)) to a member of the consolidated group.

(5) The consolidated group claims a worthless stock deduction with respect to

any of the stock of the corporation. In this case, the designated event shall be treated as occurring on the later of the last date on which members of the group own stock that actually satisfies the value requirement or the first day of the taxable year for which the deduction is claimed.

(6) The corporation engages in a recapitalization described in § 368(a)(1)(E).

(7) The consolidated group takes a position on its consolidated Federal income tax return that the value requirement is not satisfied for purposes of applying any value provision. In this case, unless the position taken reflects the occurrence of another designated event, the designated event shall be treated as occurring on the later of the last date on which members of the group own stock that actually satisfies the value requirement or the first day of the taxable year for which the position is taken. However, if a consolidated group took such a position before May 6, 2004, and the group would otherwise be eligible for relief under this notice, a designated event will not result from taking such inconsistent position if the group amends the relevant return or returns to take a position consistent with satisfaction of the value requirement for purposes of applying every applicable value provision.