Part IV. Items — Internal Revenue Bulletin 2004-38

Notice of Proposed Rulemaking by Cross-Reference to Temporary Regulations

Collected Excise Taxes; Duties of Collector

REG–163909–02

AGENCY: Internal Revenue Service (IRS), Treasury.

ACTION: Notice of proposed rulemaking by cross-reference to temporary regulations.

SUMMARY: In this issue of the Bulletin, the IRS is issuing temporary regulations (T.D. 9149) relating to the obligations of persons that receive payments for air transportation or communications services subject to excise tax when persons liable for the tax refuse to pay the tax. The text of those temporary regulations also serves as the text of these proposed regulations. These proposed regulations affect persons liable for those taxes and persons that receive payments subject to tax.

DATES: Written and electronic comments and requests for a public hearing must be received by November 8, 2004.

ADDRESSES: Send submissions to: CC:PA:LPD:PR (REG–163909–02), room 5203, Internal Revenue Service, POB 7604, Ben Franklin Station, Washington, DC 20044. Submissions may be hand delivered Monday through Friday between the hours of 8 a.m. and 4 p.m. to: CC:PA:LPD:PR (REG–163909–02), Courier’s Desk, Internal Revenue Service, 1111 Constitution Avenue, NW, Washington, DC. Alternatively, taxpayers may submit comments electronically via the IRS Internet site at www.irs.gov/regs, or via the Federal eRulemaking Portal at www.regulations.gov (indicate IRS and REG–163909–02).

FOR FURTHER INFORMATION CONTACT: Concerning submissions, the Publication and Regulations Unit, (202)

622–7180; concerning the regulations, Taylor Cortright, (202) 622–3130 (not toll-free numbers).

SUPPLEMENTARY INFORMATION:

Background

These proposed regulations relate to the obligations of persons that receive payments for air transportation or communications services subject to excise tax when persons liable for the tax refuse to pay the tax. These proposed regulations would amend the Excise Tax Procedural Regulations (26 CFR part 40) and the Facilities and Services Excise Tax Regulations (26 CFR part 49). The text of temporary regulations published in this issue of the Bulletin also serves as the text of these proposed regulations. The preamble to the temporary regulations explains the temporary regulations.

Special Analyses

It has been determined that this notice of proposed rulemaking is not a significant regulatory action as defined in Executive Order 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) does not apply to these regulations, and because the notice of proposed rulemaking does not impose a collection of information on small entities, the provisions of the Regulatory Flexibility Act (5 U.S.C. chapter 6) do not apply. Pursuant to section 7805(f) of the Code, this notice of proposed rulemaking will be submitted to the Chief Counsel for Advocacy of the Small Business Administration for comment on its impact on small business.

Comments and Requests for a Public Hearing

Before these proposed regulations are adopted as final regulations, consideration will be given to any written comments (a signed original and eight (8) copies) or electronic comments that are submitted timely to the IRS. The IRS and Treasury Department specifically request comments on the clarity of the proposed regulations

and how they may be made easier to understand. All comments will be available for public inspection and copying. A public hearing may be scheduled if requested in writing by any person that timely submits written comments. If a public hearing is scheduled, notice of the date, time, and place for the hearing will be published in the Federal Register .

Drafting Information

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

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Proposed Amendments to the Regulations

Accordingly, 26 CFR parts 40 and 49 are proposed to be amended as follows:

PART 40—EXCISE TAX PROCEDURAL REGULATIONS

Paragraph 1. The authority citation for part 40 continues to read, in part, as follows:

Authority: 26 U.S.C. 7805 * * * Par. 2. Section 40.6302(c)–3 is amended by revising paragraph (b)(2)(ii)(B) to read as follows:

§40.6302(c)–3 Special rules for use of Government depositaries under chapter 33.

- - - (b) - * (2) - * (ii) - * (B) [The text of this proposed paragraph is the same as the text of §40.6302(c)–3T(b)(2)(ii)(B) published elsewhere in this issue of the Bulletin].

PART 49—FACILITIES AND SERVICES EXCISE TAXES

Par. 3. The authority citation for part 49 continues to read in part as follows:

2004–38 I.R.B. 499 September 20, 2004

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

Comments and Requests for Public Hearing

Before these proposed regulations are adopted as final regulations, consideration will be given to any written (a signed original and eight (8) copies) or electronic comments that are submitted timely to the IRS. The IRS and Treasury Department request comments on the clarity of the proposed rules and how they can be made easier to understand. All comments will be available for public inspection and copying. A public hearing will be scheduled if requested in writing by any person that timely submits written comments. If a public hearing is scheduled, notice of the date, time, and place of the public hearing will be published in the Federal Register .

Drafting Information

The principal author of this regulation is Rebekah A. Myers, Office of Associate Chief Counsel (Passthroughs and Special Industries), IRS. However, other personnel from the IRS and Treasury Department participated in their development.

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Proposed Amendments to the Regulations

Accordingly, 26 CFR part 1 is amended as follows:

PART 301—PROCEDURE AND ADMINISTRATION

Paragraph 1. The authority citation for part 301 continues to read, in part, as follows:

Authority: 26 U.S.C. 7805 * * * Para. 2. Section 301.7701–3 is amended by adding paragraphs (c)(1)(v)(C) and (h)(3) to read as follows:

§301.7701–3 Classification of certain business entities.

[The text of the proposed amendment is the same as the text of §301.7701–3T published elsewhere in this issue of the Bulletin].

Authority: 26 U.S.C. 7805 * * * Par. 4. Section 49.4291–1 is amended by revising the fourth sentence to read as follows:

§49.4291–1 Persons receiving payment must collect tax.

- - [The text of this proposed sentence is the same as the text of §49.4291–1T published elsewhere in this issue of the Bulletin].* - *

Mark E. Matthews, Deputy Commissioner for Services and Enforcement .

(Filed by the Office of the Federal Register on August 9, 2004, 8:45 a.m., and published in the issue of the Federal Register for August 10, 2004, 69 F.R. 48432)

Notice of Proposed Rulemaking by Cross Reference to Temporary Regulations

Deemed Election To Be an Association Taxable as a Corporation for a Qualified Electing S Corporation

REG–131786–03

AGENCY: Internal Revenue Service (IRS), Treasury.

ACTION: Notice of proposed rulemaking by cross reference to temporary regulations.

SUMMARY: In this issue of the Bulletin, the IRS is issuing temporary regulations (T.D. 9139) that deem certain eligible entities that file timely S corporation elections to have elected to be classified as associations taxable as corporations. The text of those temporary regulations also serves as the text of these proposed regulations. These regulations affect certain eligible entities filing timely elections to be S corporations on or after July 20, 2004.

DATES: A request for a public hearing and written or electronic comments must be received by October 18, 2004.

ADDRESSES: Send submissions to CC:PA:LPD:PR (REG–131786–03), room 5203, Internal Revenue Service, POB 7604, Ben Franklin Station, Washington, DC, 20044. Submissions may be hand delivered between the hours of 8 a.m. and 4 p.m. to CC:PA:LPD:PR (REG–131786–03), Courier’s Desk, Internal Revenue Service, 1111 Constitution Avenue, NW, Washington, DC, or sent electronically, via the IRS Internet site at: www.irs.gov/regs or via the Federal E-Rulemaking Portal at www.regulations.gov (IRS and REG–131786–03).

FOR FURTHER INFORMATION CONTACT: Rebekah A. Myers at (202) 622–3050 (not a toll-free number).

SUPPLEMENTARY INFORMATION:

Background

Temporary regulations published elsewhere in this issue of the Bulletin amend §301.7701–3T(c)(1)(v)(C) to provide that certain eligible entities that file timely S corporation elections are deemed to have elected to be classified as associations taxable as corporations. The text of the temporary regulations also serves as the text of these proposed regulations. The preamble to the temporary regulations explains the temporary regulations.

Special Analysis

It has been determined that this notice of proposed rulemaking is not a significant regulatory action as defined in Executive Order 12866. Therefore a regulatory assessment is not required. It is hereby certified that the collection of information in these regulations will not have a significant economic impact on a substantial number of small entities. This certification is based upon the fact that the purpose of the regulation is to decrease the number of entities required to file an entity classification election, Form 8832. Therefore, a Regulatory Flexibility Analysis under the Regulatory Flexibility Act (5 U.S.C. chapter 6) is not required. Pursuant to section 7805(f) of the Internal Revenue Code, this notice of proposed regulation will be submitted to the Chief Counsel for Advocacy

September 20, 2004 500 2004–38 I.R.B.

statutory requirements of the reorganization provisions but also certain nonstatutory requirements, including the continuity of interest and continuity of business enterprise requirements. See §1.368–1(b). The purpose of the continuity requirements is to ensure that reorganizations are limited to readjustments of continuing interests in property under modified corporate form and to prevent transactions that resemble sales from qualifying for nonrecognition of gain or loss available to corporate reorganizations. §1.368–1(d)(1) and (e)(1); see also LeTulle v. Scofield, 308 U.S. 415 (1940); Helvering v. Minnesota Tea Co., 296 U.S. 378 (1935); Pinellas Ice & Cold Storage Co. v. Commissioner, 287 U.S. 462 (1933). Despite the general rule, the courts and the Service have taken the position that the continuity of interest and continuity of business enterprise requirements need not be satisfied for a transaction to qualify as an E reorganization. See Hickok v. Commissioner, 32 T.C. 80 (1959); Rev. Rul. 82–34, 1982–1 C.B. 59; Rev. Rul. 77–415, 1977–2 C.B. 311. In Revenue Rulings 77–415 and 82–34, the IRS reasoned that the continuity of interest and continuity of business enterprise requirements are necessary in an acquisitive reorganization to ensure that the transaction does not involve an otherwise taxable transfer of stock or assets, but that they are not necessary when the transaction involves only a single corporation.

Although an F reorganization may involve an actual or deemed transfer of assets from one corporation to another, such a transaction effectively involves only one corporation. In this way, an F reorganization is much like an E reorganization, which can only involve one corporation even in form. As a result, an F reorganization is treated for most purposes of the Code as if the reorganized corporation were the same entity as the corporation in existence before the reorganization. Consequently, the taxable year of the corporation does not end on the date of the transfer, and the losses of the reorganized corporation can be carried back to offset income of its predecessor. See §1.381(b)–1(a)(2). Nonetheless, courts have applied the continuity requirements in determining whether a transaction qualifies as an F reorganization. See, e.g., Pridemark, Inc. v. Com- missioner, 345 F.2d 35 (4 ^th Cir. 1965)

Mark E. Matthews, Deputy Commissioner for Services and Enforcement.

(Filed by the Office of the Federal Register on July 19, 2004, 8:45 a.m., and published in the issue of the Federal Register for July 20, 2004, 69 F.R. 43369)

Notice of Proposed Rulemaking

Reorganizations Under Section 368(a)(1)(E) or (F)

REG–106889–04

AGENCY: Internal Revenue Service (IRS), Treasury.

ACTION: Notice of proposed rulemaking.

SUMMARY: This document contains proposed regulations that provide guidance regarding the requirements for a transaction to qualify as a reorganization under section 368(a)(1)(E) or (F) of the Internal Revenue Code. The proposed regulations will affect corporations and their shareholders.

DATES: Written or electronic comments and requests for a public hearing must be received by November 10, 2004.

ADDRESSES: Send submissions to: CC:PA:LPD:PR (REG–106889–04), room 5203, Internal Revenue Service, PO Box 7604, Ben Franklin Station, Washington, DC 20044. Submissions may be hand-delivered Monday through Friday between the hours of 8 a.m. and 4 p.m. to CC:PA:LPD:PR (REG–106889–04), Courier’s Desk, Internal Revenue Service, 1111 Constitution Avenue, NW, Washington, DC, or sent electronically, via the Internal Revenue Service Internet site at www.irs.gov/regs or via the Federal eRulemaking Portal at www.regulations.gov (IRS — REG–106889–04).

FOR FURTHER INFORMATION CONTACT: Concerning the proposed regulations, Robert B. Gray, (202) 622–7550; concerning submissions of comments, Guy R. Traynor, (202) 622–7180 (not toll-free numbers).

SUPPLEMENTARY INFORMATION:

Background and Explanation of Provisions

In general, upon the exchange of property, gain or loss must be accounted for if the new property differs materially, in kind or extent, from the old property. See Internal Revenue Code (Code) §1001; §1.368–1(b). The purpose of the reorganization provisions of the Internal Revenue Code (the Code) is to except from the general rule certain specifically described exchanges that are required by business exigencies and effect only a readjustment of continuing interests in property under modified corporate forms. See §1.368–1(b).

Section 368(a)(1)(E) provides that the term reorganization includes a recapitalization (an E reorganization). A recapitalization has been defined as a “reshuffling of a capital structure within the framework of an existing corporation.” Helvering v. Southwest Consolidated Corp., 315 U.S. 194 (1942). Section 368(a)(1)(F) provides that the term reorganization includes a mere change in identity, form, or place of organization of one corporation, however effected (an F reorganization). One court has described the F reorganization as follows:

[The F reorganization] encompass[es] only the simplest and least significant of corporate changes. The (F)-type reorganization presumes that the surviving corporation is the same corporation as the predecessor in every respect, except for minor or technical differences. For instance, the (F) reorganization typically has been understood to comprehend only such insignificant modifications as the reincorporation of the same corporate business with the same assets and the same stockholders surviving under a new charter either in the same or in a different State, the renewal of a corporate charter having a limited life, or the conversion of a U.S.-chartered savings and loan association to a State-chartered institution. Berghash v. Commissioner, 43 T.C. 743, 752 (1965) (citation and footnotes omitted), aff’d, 361 F.2d 257 (2 ^nd Cir. 1966).

To qualify as a reorganization, a transaction must generally satisfy not only the

2004–38 I.R.B. 501 September 20, 2004

The third requirement (providing for the liquidation of the transferring corporation) and the fourth requirement (limiting the assets the resulting corporation may hold immediately before the transfer) reflect the statutory requirement that an F reorganization involve only one corporation. Although the proposed regulations generally require that the transferring corporation completely liquidate in the transaction, they do not require the transferring corporation to legally dissolve, thereby facilitating preservation of the value of the transferring corporation’s charter. Further, to accommodate transactions in jurisdictions where it is customary to preserve pre-existing entities for future use rather than create new ones, the proposed regulations permit the retention of a nominal amount of assets for the sole purpose of preserving the transferring corporation’s legal existence.

Although the proposed regulations generally require that the resulting corporation not hold any property or have any tax attributes immediately before the transfer, they do allow the resulting corporation to hold or to have held a nominal amount of assets to facilitate its organization or preserve its existence, and to have tax attributes related to these assets. In addition, to accommodate transactions involving the refinancing of debt or the leveraged redemption of shareholders, the proposed regulations provide that this requirement will not be violated if, before the transfer, the resulting corporation holds the proceeds of borrowings undertaken in connection with the transaction.

As described above, section 368(a) (1)(F) provides that an F reorganization includes a mere change in identity, form, or place of organization of one corporation, however effected. The IRS and the Treasury Department believe that the inclusion of the words “however effected” in the statutory definition of an F reorganization reflects a Congressional intent to treat as an F reorganization a series of transactions that together result in a mere change. The proposed regulations reflect this view by providing that a series of related transactions that together result in a mere change may qualify as an F reorganization.

The IRS and the Treasury Department also recognize that a reorganization qualifying under section 368(a)(1)(F) may be

(stating that the application of the F reorganization statute is limited to cases where the corporate enterprise continues uninterrupted, except perhaps for a distribution of some of its liquid assets); Yoc Heat- ing Corp. v. Commissioner, 61 T.C. 168 (1973) (holding that continuity of interest is required for an F reorganization).

The Service and the Treasury Department have considered whether continuity of interest and continuity of business enterprise should be requirements of an F reorganization. Because F reorganizations involve only the slightest change in a corporation and do not resemble sales, the Service and the Treasury Department have concluded that applying the continuity of interest and continuity of business enterprise requirements to transactions that would otherwise qualify as F reorganizations is not necessary to protect the policies underlying the reorganization provisions. Therefore, these proposed regulations provide that a continuity of interest and a continuity of business enterprise are not required for a transaction to qualify as an F reorganization. In addition, to reflect the IRS’ position in Revenue Rulings 77–415 and 82–34, these proposed regulations provide that a continuity of interest and a continuity of business enterprise are not required for a transaction to qualify as an E reorganization.

In light of the proposed rules regarding the application of the continuity requirements to transactions that otherwise qualify as F reorganizations, the IRS and the Treasury Department believe it is desirable to provide guidance regarding the characteristics of F reorganizations. These regulations propose such criteria.

Consistent with section 368(a)(1)(F), the proposed regulations provide that, to qualify as an F reorganization, a transaction must result in a mere change in identity, form, or place of organization of one corporation. The proposed regulations further provide that a transaction that involves an actual or deemed transfer is a mere change only if four requirements are satisfied. First, all the stock of the resulting corporation, including stock issued before the transfer, must be issued in respect of stock of the transferring corporation. Second, there must be no change in the ownership of the corporation in the transaction, except a change that has no effect other than that of a redemption of

less than all the shares of the corporation. Third, the transferring corporation must completely liquidate in the transaction. Fourth, the resulting corporation must not hold any property or have any tax attributes (including those specified in section 381(c)) immediately before the transfer.

The first two requirements reflect the Supreme Court’s holding in Helvering v. Southwest Consolidated, 315 U.S. 194 (1942), that a transaction that shifts the ownership of the proprietary interests in a corporation cannot be a mere change. These requirements prevent a transaction that involves the introduction of a new shareholder or new capital into the corporation from qualifying as an F reorganization. Such an introduction may occur, for example, when a new shareholder contributes assets to the resulting corporation in exchange for stock before a merger of the transferring corporation into the resulting corporation. Notwithstanding these requirements, the proposed regulations permit the resulting corporation’s issuance of a nominal amount of stock not in respect of stock of the transferring corporation to facilitate the organization of the resulting corporation. This rule is designed to permit reincorporation in a jurisdiction that requires, for example, minimum capitalization, two or more shareholders, or ownership of shares by directors. It is also intended to permit a transfer of assets to certain pre-existing entities.

The second requirement allows changes of ownership that have no effect other than a redemption of less than all the shares of the corporation to reflect the case law holding that certain transactions qualify as F reorganizations even if shareholders are redeemed in the transaction. See Reef Corp. v. U.S., 368 F.2d 125 (5 ^th Cir. 1966) (holding that a redemption of 48 percent of the stock of a corporation that occurred during a change in place of incorporation did not cause the transaction to fail to qualify as an F reorganization); cf. Casco Prod- ucts Corp. v. Commissioner, 49 T.C. 32 (1967) (holding that the surviving corporation in a merger was the continuation of the merging corporation for purposes of allowing a loss carryback, despite the forced redemption of nine percent of the stock of the merging corporation).

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date, time, and place for the public hearing will be published in the Federal Register .

Drafting Information

The principal author of these proposed regulations is Robert B. Gray of the Office of Associate Chief Counsel (Corporate). However, other personnel from the Service and Treasury Department participated in their development.

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Proposed Amendments to the Regulations

Accordingly, 26 CFR part 1 is proposed to be amended as follows:

PART 1—INCOME TAXES

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

Authority: 26 U.S.C. 7805 * * * Par. 2. Section 1.368–1(b) is amended by adding a sentence after the third sentence to read as follows:

§1.368–1 Purpose and scope of exception of reorganization exchanges.

- - - (b) Purpose . - * * Notwithstanding the previous sentence, for transactions on or after the date these regulations are published as final regulations in the Federal Register, a continuity of the business enterprise and a continuity of interest are not required for a transaction to qualify as a reorganization under section 368(a)(1)(E) or (F). - -
- - - Par. 3. Section 1.368–2 is amended by:

Adding and reserving new paragraph (l).
Adding new paragraph (m). The addition reads as follows:

§1.368–2 Definition of terms.

- - - (l) [Reserved]. (m) Qualification as a reorganization under section 368(a)(1)(F) - (1) Mere change - (i) In general . To qualify as a reorganization under section 368(a)(1)(F), a transaction must result in a mere change in identity, form, or place of organization of

a step in a larger transaction that effects more than a mere change. For example, in Revenue Ruling 96–29, 1996–1 C.B. 50, the IRS ruled that a reincorporation qualified as an F reorganization even though it was a step in a transaction in which the reincorporated entity issued common stock in a public offering and redeemed stock having a value of 40 percent of the aggregate value of its outstanding stock before the offering. In the same ruling, the IRS ruled that a reincorporation of a corporation in another state qualified as an F reorganization even though it was a step in a transaction in which the reincorporated entity acquired the business of another entity.

Consistent with Revenue Ruling 96–29, the proposed regulations provide that related events preceding or following the transaction or series of transactions that constitute a mere change do not cause that transaction or series of transactions to fail to qualify as an F reorganization. The proposed regulations further provide that the qualification of the mere change as an F reorganization does not alter the treatment of the larger transaction. For example, if a redemption of stock occurs in a transaction that qualifies as an F reorganization and the F reorganization is part of a plan that includes a subsequent merger, the step or series of steps constituting the F reorganization will not alter the tax consequences of the subsequent merger.

A number of commentators have questioned whether distributions of money or other property in an F reorganization are distributions to which section 356 applies. The IRS and the Treasury Department believe it is appropriate to treat such distributions as transactions separate from the F reorganization, even if they occur during the F reorganization. See, e.g., §1.301–1( l ). Accordingly, these proposed regulations provide that if a shareholder receives money or other property (including in exchange for its shares) from the transferring or resulting corporation in a transaction that constitutes an F reorganization, the money or other property is treated as distributed by the transferring corporation immediately before the transaction. The tax treatment of such distributions is governed by sections 301 and 302, and section 356 does not apply to such distributions. The IRS and the Treasury Department believe that the same

rule should apply in the context of E reorganizations. Comments are requested on whether there are some E reorganizations to which this treatment should not apply.

These regulations are proposed to be effective for transactions that occur on or after the date these regulations are published as final regulations in the Federal Regis- ter .

Effect on Other Documents

Upon the issuance of these regulations as final regulations, Rev. Rul. 66–284, 1966–2 C.B. 115, Rev. Rul. 74–36, 1974–1 C.B. 85, Rev. Rul. 77–415, 1977–2 C.B. 311, Rev. Rul. 77–479, 1977–2 C.B. 119, Rev. Rul. 79–250, 1979–2 C.B. 156, Rev. Rul. 82–34, 1982–1 C.B. 59, and Rev. Rul. 96–29, 1996–1 C.B. 50, will be obsoleted.

Special Analyses

It has been determined that this notice of proposed rulemaking is not a significant regulatory action as defined in Executive Order 12866. Therefore, a regulatory assessment is not required. It has also been determined that section 553(b) of the Administrative Procedure Act (5 U.S.C. chapter 5) does not apply to these regulations, and, because these regulations do not impose a collection of information on small entities, the Regulatory Flexibility Act (5 U.S.C. chapter 6) does not apply. Pursuant to section 7805(f) of the Code, this notice of proposed rulemaking will be submitted to the Chief Counsel for Advocacy of the Small Business Administration for comment on its impact on small businesses.

Comments and Requests for a Public Hearing

Before these proposed regulations are adopted as final regulations, consideration will be given to any written (a signed original and eight (8) copies) or electronic comments that are submitted timely to the Service. The IRS and Treasury Department request comments on the clarity of the proposed rules and how they can be made easier to understand. All comments will be available for public inspection and copying. A public hearing will be scheduled if requested in writing by any person that timely submits written comments. If a public hearing is scheduled, notice of the

2004–38 I.R.B. 503 September 20, 2004

merger of X into Y is a mere change and qualifies as a reorganization under section 368(a)(1)(F).

Example 3 . D owns all of the stock of S, a Country A corporation. The management of S determines that it would be in the best interest of S to reorganize under the laws of Country B. Under Country B law, a corporation must have at least two shareholders to enjoy limited liability. D is advised by a Country B attorney that the new corporation should issue one percent of its stock to a shareholder that is not D’s nominee to assure satisfaction of the two-shareholder requirement. As part of an integrated plan, E organizes T, a Country B corporation with 1,000 shares of common stock authorized, and contributes cash to T in exchange for ten of the common shares. S then merges into T under the laws of Country A and Country B. Pursuant to the plan of merger, D surrenders his shares of stock in S in exchange for 990 shares of T common stock. Without regard to the prior issuance of T stock to E, the merger of S into T is a mere change of S. The ten shares of stock issued to E not in respect of the S stock are nominal and used to facilitate the organization of T within the meaning of paragraph (m)(1)(ii)(B) of this section. Therefore, the issuance of this stock to a new shareholder does not cause the merger of S into T to fail to be a mere change. Accordingly, the merger is a reorganization under section 368(a)(1)(F).

Example 4 . A owns all of the stock of H, a corporation that owns all of the stock of S, a corporation engaged in a manufacturing business. H has owned the stock of S for many years. H owns no assets other than the stock of S. A decides to eliminate the holding company structure by merging H into S. Because it operates a manufacturing business, the resulting corporation, S, holds property and has tax attributes immediately before the transfer. Therefore, under paragraph (m)(1)(i)(D) of this section, the merger of H into S is not a mere change and does not qualify as a reorganization under section 368(a)(1)(F). The same result would occur if, instead of H merging into S, S merged into H.

Example 5 . Corporation P owns all of the stock of S1, a State X corporation. The management of P determines that it would be in the best interest of S1 to change its place of incorporation to State Y. Accordingly, under an integrated plan, P forms S2, a new State Y corporation, P contributes the S1 stock to S2, and S1 merges into S2 under the laws of State X and State Y. Under paragraph (m)(3)(i) of this section, a series of transactions that together result in a mere change of one corporation may qualify as a reorganization under section 368(a)(1)(F). The contribution of S1 stock to S2 and the merger of S1 into S2 together constitute a mere change of S1. Therefore, the transaction qualifies as a reorganization under section 368(a)(1)(F). S1 is treated as transferring its assets to S2 in exchange for the S2 stock and distributing the S2 stock to P in exchange for P’s S1 stock.

Example 6 . Corporation P owns all of the stock of S, a State X corporation. The management of P determines that it would be in the best interest of S to change its place of incorporation to State Y. Accordingly, P forms New S, a State Y corporation. S then merges into New S under the laws of State X and State Y. As part of the same plan, P sells all of its stock in New S to an unrelated party. Without regard to the sale of New S stock, the merger of S into New S is a mere change within the meaning of paragraph (m)(1)

one corporation (“mere change”). A transaction that involves an actual or deemed transfer is a mere change only if —

(A) All the stock of the resulting corporation, including stock issued before the transfer, is issued in respect of stock of the transferring corporation;

(B) There is no change in the ownership of the corporation in the transaction, except a change that has no effect other than that of a redemption of less than all the shares of the corporation;

(D) The resulting corporation does not hold any property or have any tax attributes (including those specified in section 381(c)) immediately before the transfer.

(ii) Exceptions and special rules - (A) Transferring corporation . Legal dissolution of the transferring corporation is not required, and the mere retention of a nominal amount of assets for the sole purpose of preserving the corporation’s legal existence will not disqualify the transaction as a mere change.

(B) Resulting corporation . A transaction will not fail to be a mere change solely because the resulting corporation, to facilitate its organization, issues a nominal amount of stock other than in respect of stock of the transferring corporation. At the time of or before the transfer, the resulting corporation may hold or have held a nominal amount of assets to facilitate its organization or preserve its existence as a corporation, and may have tax attributes related to holding such assets. Moreover, the resulting corporation may hold the proceeds of borrowings undertaken in connection with the transaction.

(2) Non-application of continuity of in- terest and continuity of business enterprise requirements . A continuity of the business enterprise and a continuity of interest are not required for a transaction to qualify as a reorganization under section 368(a)(1)(F). See §1.368–1(b).

(3) Related transactions - (i) Series of transactions . A series of related transactions that together result in a mere change may qualify as a reorganization under section 368(a)(1)(F).

(ii) Mere change within a larger trans- action . A reorganization under section 368(a)(1)(F) may occur within a larger transaction that effects more than a mere

change. Related events that precede or follow the transaction or series of transactions that constitutes a mere change will not cause that transaction or series of transactions to fail to qualify as a reorganization under section 368(a)(1)(F). Qualification of the mere change as a reorganization under section 368(a)(1)(F) will not alter the treatment of the larger transaction.

(4) Treatment of distributions . If a shareholder receives money or other property (including in exchange for its shares) from the transferring or resulting corporation in a transaction that constitutes a reorganization under section 368(a)(1)(F), the money or other property is treated as distributed by the transferring corporation immediately before the transaction, and section 356(a) does not apply to such distribution. See, e.g., §1.301–1( l ).

(5) Examples . The following examples illustrate the application of this paragraph (m). In all examples, assume that each transaction is entered into for a valid business purpose and that all corporations are domestic corporations, unless stated otherwise. The examples are as follows:

Example 1 . C owns all of the stock of W, a State A corporation. The net value of W’s assets and liabilities is $1,000,000. V, a State B corporation, seeks to acquire the assets of W. To effect the acquisition, V and W enter into an agreement under which V will contribute $1,000,000 to U, a newly formed corporation of which V is the sole shareholder, and W will merge into U. In the merger, C surrenders his W stock in exchange for the $1,000,000 V contributed to U. After the merger, U holds all of the assets and liabilities of W. However, the U stock is not issued in respect of the W stock as required by paragraph (m)(1)(i)(A) of this section, and the transaction results in a change in the ownership of W that has an effect other than that of a redemption of some of the W shares in violation of paragraph (m)(1)(i)(B) of this section. Therefore, the merger of W into U is not a mere change and does not qualify as a reorganization under section 368(a)(1)(F).

Example 2 . A and B own 75 and 25 percent, respectively, of the stock of X, a State A corporation. The management of X determines that it would be in the best interest of X to reorganize under the laws of State B. Accordingly, X forms Y, a State B corporation, and X and Y enter into an agreement under which X will merge into Y. A does not wish to own stock in Y. In the merger, A surrenders her X stock in exchange for cash from X from X’s cash reserves, and B exchanges all of his X stock for all the stock of Y. Without regard to A’s surrender of her stock in X, the merger of X into Y is a mere change of X. The change in ownership caused by A’s surrender of her stock in X has no effect other than that of a redemption of less than all the X shares as described in paragraph (m)(1)(i)(B) of this section. Therefore, the

September 20, 2004 504 2004–38 I.R.B.

at http://www.regulations.gov (IRS and REG–116265–04).

FOR FURTHER INFORMATION CONTACT: Concerning the proposed regulations, J. Peter Baumgarten, 202–622–4920; concerning submissions of comments and/or requests for a public hearing, Guy Traynor, 202–622–7180 (not toll-free numbers).

SUPPLEMENTARY INFORMATION:

Background and Explanation of Provisions

Temporary regulations in this issue of the Bulletin amend 26 CFR Part 1 relating to section 1031(a)(1). The temporary regulations substitute NAICS classification codes for the SIC classification codes in the regulatory text and permit the use of NAICS codes for determining product classes, and therefore property of like kind, of depreciable tangible personal property exchanged under section 1031. The text of those temporary regulations also serves as the text of these proposed regulations. The preamble to the temporary regulations explains the amendments.

Special Analyses

It has been determined that this notice of proposed rulemaking is not a significant regulatory action as defined in Executive Order 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) does not apply to these regulations, and, because the regulations do not impose a collection of information on small entities, the Regulatory Flexibility Act (5 U.S.C. chapter 6) does not apply. Pursuant to section 7805(f) of the Code, this notice of proposed rulemaking will be submitted to the Chief Counsel for Advocacy of the Small Business Administration for comment on its impact.

Comments and Requests for a Public Hearing

Before these proposed regulations are adopted as final regulations, consideration will be given to any written comments (a signed original and eight (8) copies)

of this section. Under paragraph (m)(3)(ii) of this section, related events that precede or follow the transaction or series of transactions that constitute a mere change do not cause that transaction to fail to qualify as a reorganization under section 368(a)(1)(F). Therefore, the sale of the New S stock is disregarded in determining whether the merger of S into New S is a mere change. Accordingly, the merger of S into New S is a reorganization under section 368(a)(1)(F).

Example 7 . A owns all of the stock of T and none of the stock of P. P owns all of the stock of S. T and S are State M corporations engaged in manufacturing businesses. The following transactions occur pursuant to a single plan. First, T merges into S with A receiving solely stock in P. Second, P changes its state of incorporation to State N by merging into newly organized New P under the laws of State M and State N. Third, P redeems all the stock issued to A in respect of his T stock for cash. Without regard to the other steps, the merger of T into S qualifies as a reorganization under section 368(a)(1)(A) by reason of section 368(a)(2)(D). Without regard to the other steps, the merger of P into New P qualifies as a reorganization under section 368(a)(1)(F). Under paragraph (m)(3)(ii) of this section, related events that precede or follow the transaction or series of transactions that constitute a mere change do not cause that transaction to fail to qualify as a reorganization under section 368(a)(1)(F). Therefore, the merger of P into New P qualifies as a reorganization under section 368(a)(1)(F). However, under paragraph (m)(3)(ii) of this section, the qualification of the merger of P into New P as a reorganization under section 368(a)(1)(F) does not alter the tax treatment of the merger of T into S. Because the P shares received by A in respect of the T shares are redeemed for cash pursuant to the plan, the merger of T into S does not satisfy the continuity of interest requirement and does not qualify as a reorganization under section 368(a)(1)(A).

Example 8 . Corporation P owns all of the stock of S, a State A corporation. The management of P determines that it would be in the best interest of S to change its form from a State A corporation to a State A limited partnership. Accordingly, P contributes one percent of the S stock to newly formed LLC, a limited liability company, in exchange for all of the membership interests in LLC. Under §301.7701–3 of this chapter, LLC is disregarded as an entity separate from its owner, P. Under a State A statute, S converts to a State A limited partnership. In the conversion, P’s interest as a 99 percent shareholder of S is converted into a 99 percent limited partner interest, and LLC’s interest as a one percent shareholder of S is converted into a one percent general partner interest. S then elects, under §301.7701–3(c), to be classified as a corporation for federal income tax purposes, effective on the date of the conversion. The conversion of S from a State A corporation to a State A limited partnership, together with the election to treat S as a corporation for federal tax purposes, constitutes a mere change and is a reorganization under section 368(a)(1)(F). (6) Effective Date . This paragraph (m) applies to transactions occurring on or after the date these regulations are published as final regulations in the Federal Regis- ter .

Linda M. Kroening, Acting Deputy Commissioner for

Services and Enforcement.

(Filed by the Office of the Federal Register on August 11, 2004, 8:45 a.m., and published in the issue of the Federal Register for August 12, 2004, 69 F.R. 49836)

Notice of Proposed Rulemaking by Cross-Reference to Temporary Regulations

Additional Rules for Exchanges of Personal Property Under Section 1031(a) Regulations

REG–116265–04

AGENCY: Internal Revenue Service (IRS), Treasury.

ACTION: Notice of proposed rulemaking by cross-reference to temporary regulations.

SUMMARY: In this issue of the Bulletin, the IRS is issuing final and temporary regulations (T.D. 9151) replacing the use of the Standard Industrial Classification (SIC) system with the North American Industry Classification System (NAICS) for determining what properties are of a like class for purposes of section 1031 of the Internal Revenue Code (Code). The text of those temporary regulations also serves as the text of these proposed regulations.

DATES: Written or electronic comments and requests for a public hearing must be received by November 12, 2004.

ADDRESSES: Send submissions to: CC:PA:LPD:PR (REG–116265–04), room 5203, Internal Revenue Service, PO Box 7604, Ben Franklin Station, Washington, DC 20044. Submissions may be hand-delivered Monday through Friday between the hours of 8 a.m. and 4 p.m. to: CC:PA:LPD:PR (REG–116265–04), Courier’s Desk, Internal Revenue Service, 1111 Constitution Avenue, NW, Washington, DC. Alternatively, taxpayers may submit electronic comments directly to the IRS internet site at http://www.irs.gov/regs or via the Federal eRulemaking Portal

2004–38 I.R.B. 505 September 20, 2004

or electronic comments that are submitted timely to the IRS. The IRS and Treasury Department request comments on the clarity of these proposed regulations and how they may be made easier to understand. All comments will be available for public inspection and copying. A public hearing will be scheduled if requested in writing by any person that timely submits written comments. If a public hearing is scheduled, notice of the date, time, and place for the public hearing will be published in the Federal Register .

Drafting Information

The principal author of these regulations is J. Peter Baumgarten, Office of Associate Chief Counsel (Income Tax and Accounting). However, other personnel from the IRS and Treasury Department participated in their development.

- - - -

Proposed Amendments to the Regulations

Accordingly, 26 CFR part 1 is proposed to be 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. In §1.1031(a)–2, paragraphs (b)(3) through (b)(6), and Example 3 and Example 4 of paragraph (b)(7) are revised to read as follows:

§1.1031(a)–2 Additional rules for exchanges of personal property.

[The text of proposed §1.1031(a)–2, paragraphs (b)(3) through (b)(6), and Ex- ample 3 and Example 4 of paragraph (b)(7) is the same as the text of §1.1031(a)–2T, paragraphs (b)(3) through (b)(6), and Ex- ample 3 and Example 4 of paragraph (b)(7) published elsewhere in this issue of the Bulletin.] §1.1031(j)–1 [Amended]

Par. 3. Section 1.1031(j)–1 is amended by removing the language “(SIC Code 3531)” in Example 3 (ii)(C) and Exam- ple 5 (i) of paragraph (d) and adding the language “(NAICS code 333120)” in its place.

Linda M. Kroening, Acting Deputy Commissioner for

Services and Enforcement.

(Filed by the Office of the Federal Register on August 12, 2004, 8:45 a.m., and published in the issue of the Federal Register for August 13, 2004, 69 F.R. 50108)

Notice of Proposed Rulemaking

Consolidated Returns; Intercompany Transactions

REG–131264–04

AGENCY: Internal Revenue Service (IRS), Treasury.

ACTION: Notice of proposed rulemaking.

SUMMARY: This document contains proposed regulations that provide guidance regarding the treatment of manufacturer incentive payments between members of a consolidated group. The proposed regulations are necessary to provide additional guidance for a variety of transactions involving manufacturer incentive payments. The regulations will affect corporations filing consolidated returns.

DATES: Written or electronic comments and requests for a public hearing must be received by November 11, 2004.

ADDRESSES: Send submissions to: CC:PA:LPD:PR (REG–131264–04), room 5203, Internal Revenue Service, PO Box 7604, Ben Franklin Station, Washington, DC 20044. Submissions may be hand-delivered Monday through Friday between the hours of 8 a.m. and 4 p.m. to CC:PA:LPD:PR (REG–131264–04), Courier’s Desk, Internal Revenue Service, 1111 Constitution Avenue, NW, Washington, DC. Alternatively, taxpayers may submit comments electronically, via the IRS Internet site at www.irs.gov/regs or via the Federal eRulemaking Portal at www.regu- lations.gov (IRS and REG–131264–04).

FOR FURTHER INFORMATION CONTACT: Concerning the proposed regulations, Frances Kelly, (202) 622–7770; concerning submissions of comments and/or requests for a public hearing,

Treena Garrett, (202) 622–7180 (not toll-free numbers).

SUPPLEMENTARY INFORMATION:

Background and Explanation of Provisions

This document contains proposed amendments to the Income Tax Regulations (26 CFR part 1) under section 1502 of the Internal Revenue Code. On July 18, 1995, final regulations (T.D. 8597, 1995–2 C.B. 147) under §1.1502–13, amending the intercompany transaction system of the consolidated return regulations, were published in the Federal Register (60 FR 36671). Those final regulations provide rules for taking into account items of income, gain, deduction, and loss of members from intercompany transactions. Their purpose is to clearly reflect the taxable income (and tax liability) of the group by preventing intercompany transactions from creating, accelerating, avoiding, or deferring consolidated taxable income or consolidated tax liability.

Accounting for Intercompany Transactions

Under §1.1502–13(b)(1), an intercompany transaction is a transaction between corporations that are members of the same consolidated group immediately after the transaction. For purposes of §1.1502–13, S is the member transferring property or providing services, and B is the member receiving the property or services.

S’s income, gain, deduction, and loss from an intercompany transaction, whether directly or indirectly, are its intercompany items, and may include amounts from an intercompany transaction that are not yet taken into account under its separate entity method of accounting. B’s income, gain, deduction, and loss from an intercompany transaction, or from property acquired in an intercompany transaction, are its corresponding items. An item is a corresponding item whether it is directly or indirectly from an intercompany transaction (or from property acquired in an intercompany transaction). The recomputed corresponding item is the corresponding item that B would take into account if S and B were divisions of a single corporation and the intercompany

September 20, 2004 506 2004–38 I.R.B.

original and eight (8) copies) or electronic comments that are submitted timely to the IRS. The IRS and Treasury Department request comments on the clarity of the proposed rules and how they can be made easier to understand. All comments will be available for public inspection and copying. A public hearing will be scheduled if requested in writing by any person that timely submits written or electronic comments. If a public hearing is scheduled, notice of the date, time, and place for the public hearing will be published in the Federal Register .

Drafting Information

The principal author of these proposed regulations is William F. Barry, Office of the Associate Chief Counsel (Corporate). However, other personnel from the IRS and Treasury Department participated in their development.

- - - -

Proposed Amendments to the Regulations

Accordingly, 26 CFR part 1 is proposed to be amended as follows:

PART 1—INCOME TAXES

Paragraph 1. The authority citation for part 1 is amended by adding an entry in numerical order to read in part as follows:

Authority: 26 U.S.C. 7805 * * * Section 1.1502–13 also issued under 26 U.S.C. 1502. - * *

Par. 2. Section 1.1502–13 is amended by adding paragraph (c)(7)(ii), Example 13 (c), (d), and (e), and paragraph (c)(7)(iii) to read as follows:

§1.1502–13 Intercompany transactions.

- - - (c) * - (7) * * * (i) * * * (ii) - * Example 13 . - * * (a) * * * (c) Deduction for incentive payment on single en- tity basis . B is a manufacturer that sells its products to independent dealers for resale. S is a credit company that offers financing, including financing to customers of the independent dealers. During Year 1, B initiates a program of incentive payments. Under B’s program, an independent dealer sells product to a customer under a retail installment sales contract (RISC) in which the customer agrees to pay for the product

transaction were between those divisions. Although neither S nor B actually takes the recomputed corresponding item into account, it is computed as if B did take it into account.

Matching Rule

In general, under the matching rule of §1.1502–13(c), B takes its corresponding item into account under its separate entity accounting method and S takes its intercompany item into account to reflect the difference for the year between B’s corresponding item taken into account and the recomputed corresponding item. The matching rule determines when the intercompany transaction regulations override the members’ timing of items under their otherwise applicable separate entity methods of accounting.

Manufacturer Incentive Payments

Section 1.1502–13(c)(7)(ii), Example 13, illustrates how the matching rule of the intercompany transaction regulations treats manufacturer incentive payments made by one member of a group to another. In this example, B is a manufacturer that sells its products to dealers, and S is a credit company that offers financing, including financing to customers of the dealers. Under B’s incentive program, in Year 1, S purchases the product from an independent dealer for $100 and leases it to a nonmember. S pays $90 to the dealer for the product, and assigns to the dealer its $10 incentive payment from B. Under their separate entity accounting methods, B would deduct the $10 incentive payment in Year 1 and S would take a $90 basis in the product. The example assumes that if S and B were divisions of a single corporation, the $10 payment would not be deductible and S’s basis in the property would be $100. The example concludes that under the matching rule of §1.1502–13(c), S takes its $10 intercompany item into account as income in Year 1 to reflect the difference between B’s $10 corresponding item (the $10 deduction taken into account by B) and the $0 recomputed corresponding item. S’s basis in the product is $100 (rather than the $90 it would be under S’s separate entity method of accounting) and the additional $10 of basis in the product is recovered based on

subsequent events ( e.g., S’s cost recovery deductions or its sale of the product).

Since §1.1502–13 was issued, it has become clear that the facts and the underlying assumptions in Example 13 do not provide adequate guidance to address the variety of transactions involving manufacturer incentive payments. Accordingly, the IRS and Treasury Department believe that § 1.1502–13(c)(7)(ii), Example 13, should be amended to address certain of these transactions and to clarify the proper treatment of such payments under the intercompany transaction regulations. Therefore, these proposed regulations supplement the fact pattern of Example 13 with two additional fact patterns involving manufacturer incentive payments.

Proposed Effective Date

The regulations are proposed to apply to any consolidated return year for which the due date of the income tax return (without regard to extensions) is on or after the date that is sixty days after the date these regulations are filed as final regulations with the Federal Register .

Special Analyses

It has been determined that this notice of proposed rulemaking is not a significant regulatory action as defined in Executive Order 12866. Therefore, a regulatory assessment is not required. It is hereby certified that these regulations will not have a significant economic impact on a substantial number of small entities. This certification is based upon the fact that these regulations will primarily affect affiliated groups of corporations that have elected to file consolidated returns, which tend to be larger businesses. Therefore, a Regulatory Flexibility Analysis under the Regulatory Flexibility Act (5 U.S.C. chapter 6) is not required. Pursuant to section 7805(f) of the Internal Revenue Code, this notice of proposed rule making will be submitted to the Chief Counsel for Advocacy of the Small Business Administration for comment on their impact on small business.

Comments and Requests for a Public Hearing

Before these proposed regulations are adopted as final regulations, consideration will be given to any written (a signed

2004–38 I.R.B. 507 September 20, 2004

Need for correction

As published, the notice of proposed rulemaking contains errors that may prove to be misleading and are in need of clarification.

Correction of Publication

Accordingly, the publication of the notice of proposed rulemaking (REG–150562–03), which was the subject of FR Doc. 04–15964, is corrected as follows:

On page 42371, column 1, in the preamble, under the subject heading “Background”, line 3, the language “the sale of QSB stock held by non-” is corrected to read “the sale of qualified small business (QSB) stock (as defined in section 1202(c)) held by non-”.
On page 42371, column 1, in the preamble, under the subject heading “Background” lines 8 thru 10 are corrected to read “percent of gain on the sale of QSB stock from gross income if”.
On page 42372, column 1, in the preamble, under the subject heading “Explanation of Provisions” paragraph 2, line 7, the language “though approach to the sale and” is corrected to read “through approach to the sale and”.

§1.1045–1 [Corrected]

On page 42377, column 1, §1.1045–1, paragraph (g), Example 2, line 5, the language “PRS interest for $50x, realizing $25 of capital” is corrected to read “PRS interest for $50, realizing $25 of capital”.

LaNita Van Dyke, Acting Chief, Publications

and Regulations Branch, Legal Processing Division, Associate Chief Counsel (Procedure

and Administration) .

(Filed by the Office of the Federal Register on August 9, 2004, 8:45 a.m., and published in the issue of the Federal Register for August 10, 2004, 69 F.R. 48428)

over the term of the contract at a below market interest rate. The customer purchases the product from the independent dealer and enters into a RISC. The RISC has a face amount of $100 but a fair market value of $90. The independent dealer assigns the RISC to S in exchange for a $100 payment from S. B pays $10 to S to compensate S for the $10 overpayment to the independent dealer. Assume that under their respective separate entity accounting methods, B would deduct the $10 payment in Year 1, and S would take a $90 basis in the RISC and would take the $10 into account over the term of the RISC. Assume that, if S and B were divisions of a single corporation, the $10 overpayment to the independent dealer would be deductible in Year 1 and the basis of the RISC would be $90.

(d) Timing and attributes . Under paragraph (b)(1) of this section, the incentive payment transaction is an intercompany transaction. Under paragraph (b)(2)(iii) of this section, S has a $10 intercompany item not yet taken into account under its separate entity method of accounting. Under the matching rule, S takes its intercompany item into account to reflect the difference between B’s corresponding item taken into account and the recomputed corresponding item. In Year 1, there is no difference between B’s $10 deduction taken into account and the $10 recomputed deduction. Accordingly, under the matching rule, S does not take the $10 incentive payment into account as intercompany income in Year 1. Instead, S takes the $10 into income over the term of the RISC. S’s basis in the RISC is $90.

(e) No intercompany transaction . B is a manufacturer that sells its products to independent dealers for resale. S is a credit company that offers financing to purchasers of goods and services, including the independent dealers. During Year 1, B initiates a program of incentive payments to the independent dealers. Under B’s program, S loans $100 to an independent dealer at a below market interest rate to finance the independent dealer’s purchase of product from B. The independent dealer issues a note to S at a below market interest rate. B pays $10 to S to compensate S for the below market interest rate on the note. Under §1.1273–2(g)(4), the payment from B to S is treated as a payment from B to the independent dealer and then as a payment from the independent dealer to S. Because the incentive payment is treated as being made by a member of the group to a nonmember, the transaction is not an intercompany transaction under paragraph (b)(1) of this section. Therefore, §1.1502–13 is not applicable.

- - - (iii) Effective date . Section 1.1502–13 (c)(7)(ii), Example 13 (c), (d), and (e) are proposed to apply to any consolidated return year for which the due date of the income tax return (without regard to exten

sions) is on or after the date that is sixty days after the date these regulations are filed as final regulations with the Federal Register .

Mark E. Matthews, Deputy Commissioner for Services and Enforcement .

(Filed by the Office of the Federal Register on August 12, 2004, 8:45 a.m., and published in the issue of the Federal Register for August 13, 2004, 69 F.R. 50112)

Section 1045 Application to Partnerships; Correction

Announcement 2004–68

AGENCY: Internal Revenue Service (IRS), Treasury.

ACTION: Notice of proposed rulemaking and notice of public hearing.

SUMMARY: This document contains corrections to proposed regulations (REG–150562–03, 2004–32 I.R.B. 175) that were published in the Federal Reg- ister on July 15, 2004 (69 FR 42370). This regulation relates to the application of section 1045 of the Internal Revenue Code to partnerships and their partners.

DATES: These corrections are made as of July 15, 2004.

FOR FURTHER INFORMATION CONTACT: Charlotte Chyr at (202) 622–3070 or Jian H. Grant at (202) 622–3050 (not a toll-free number).

SUPPLEMENTARY INFORMATION:

Background

The proposed regulations that are the subject of these corrections are under section 1045 of the Internal Revenue Code.

September 20, 2004 508 2004–38 I.R.B.