Part IV. Items — Internal Revenue Bulletin 2006-20

Notice of Proposed Rulemaking by Cross-Reference to Temporary Regulations

Guidance Under Section 1502; Amendment of Tacking Rule Requirements of Life-Nonlife Consolidated Regulations

REG–133036–05

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. 9258) relating to the requirements for including insurance companies in a lifenonlife consolidated return. The text of those regulations also serves as the text of these proposed regulations. These regulations affect corporations filing life-nonlife consolidated returns.

DATES: Written or electronic comments and requests for a public hearing must be received by July 24, 2006.

ADDRESSES: Send submissions to: CC:PA:LPD:PR (REG–133036–05), 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–133036–05), 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 eRulemaking Portal at www.regulations.gov (IRS - REG–133036–05).

FOR FURTHER INFORMATION CONTACT: Concerning the proposed regulations, Drafting Attorney, Ross Poulsen, (202) 622–7770; concerning submission of comments and/or requests for a public hearing, Richard Hurst,

Richard.A.Hurst@irscounsel.treas.gov, (202) 622–7180 (not toll-free numbers).

SUPPLEMENTARY INFORMATION:

Background and Explanation of Provisions

Temporary regulations in this issue of the Bulletin amend the Income Tax Regulations (26 CFR part 1) under section 1502 relating to the life-nonlife consolidated return regulations. The temporary regulations contain an exception (the tacking rule) to the five-year affiliation rules of sections 1503(c)(2) and 1504(c)(2). The temporary regulations replace the tacking rule of §1.1502–47(d)(12)(v) with a rule that does not contain a condition relating to the separation of profitable activities from loss activities. The text of those 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 is hereby certified that these regulations will not have a significant economic impact on a substantial number of small entities. This certification is based on the fact that these regulations primarily affect affiliated groups of corporations with one or more life insurance company members, which tend to be larger businesses. Moreover, the number of taxpayers affected is minimal. 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 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 (a signed original and eight (8) copies) or electronic comments that are submitted timely to the IRS. 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 Ross Poulsen, Office of Associate Chief Counsel (Corporate). 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 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 1.1502–47 is amended by:

Adding paragraphs (b)(2)(i) and (b)(2)(ii).
Removing paragraph (d)(12)(v)(C).
Redesignating paragraph (d)(12) (v)(D) and (d)(12)(v)(E) as (d)(12)(v)(C) and (d)(12)(v)(D).
Revising paragraph (d)(12)(v), and newly-designated paragraphs (d)(12)(v)(C) and (d)(12)(v)(D).

The revisions and additions read as follows:

§1.1502–47 Consolidated returns by life-nonlife groups.

[The text of this proposed section is the same as the text of §1.1502–47T published elsewhere in this issue of the Bulletin].

Par. 3. Section 1.1502–76 is amended by:

Removing paragraph (a)(2).

May 15, 2006 911 2006–20 I.R.B.

The corrections read as follows:

§1.358–2 Allocation of basis among nonrecognition property.

(a) * - (2) - * (viii) This paragraph (a)(2) shall not apply to determine the basis of a share of stock or security received by a shareholder or security holder in an exchange described in both section 351 and section 354 or section 356, if, in connection with the exchange, the shareholder or security holder exchanges property for stock or securities in an exchange to which neither section 354 nor section 356 applies or liabilities of the shareholder or security holder are assumed.

- - - (c) * - Example 4 . (i) * * * (ii) Analysis. Under paragraph (a)(2)(ii) of this section and under §1.356–1(b), because the terms of the exchange do not specify that shares of Corporation Y stock or cash are received in exchange for particular shares of Class A stock or Class B stock of Corporation X, a pro rata portion of the shares of Corporation Y stock and cash received will be treated as received in exchange for each share of Class A stock and Class B stock of Corporation X surrendered based on the fair market value of such stock. Therefore, J is treated as receiving one share of Corporation Y stock and $5 of cash in exchange for each share of Class A stock of Corporation X and one share of Corporation Y stock and $5 of cash in exchange for each share of Class B stock of Corporation X. J realizes a gain of $140 on the exchange of shares of Class A stock of Corporation X, $100 of which is recognized under §1.356–1(a). J realizes a gain of $80 on the exchanges of Class B stock of Corporation X, all of which is recognized under §1.356–1(a). Under paragraph (a)(2)(i) of this section, J has 10 shares of Corporation Y stock, each of which has a basis of $2 and is treated as having been acquired on Date 1, 10 shares of Corporation Y stock, each of which has a basis of $4 and is treated as having been acquired on Date 2, and 20 shares of Corporation Y stock, each of which has a basis of $5 and is treated as having been acquired on Date 3. Under paragraph (a)(2)(vii) of this

Redesignating paragraph (a)(1) as paragraph (a).
Revising the paragraph heading for newly-designated paragraph (a).

The revision reads as follows:

§1.1502–76 Taxable year of members of group.

[The text of this proposed section is the same as the text of §1.1502–76T 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 April 24, 2006, 8:45 a.m., and published in the issue of the Federal Register for April 25, 2006, 71 F.R. 23882)

Determination of Basis of Stock or Securities Received in Exchange for, or With Respect to, Stock or Securities in Certain Transactions; Treatment of Excess Loss Accounts; Correction

Announcement 2006–31

AGENCY: Internal Revenue Service (IRS), Treasury.

ACTION: Correcting amendment.

SUMMARY: This document contains a correction to final and temporary regulations (T.D. 9244, 2006–8 I.R.B. 463), that was published in the Federal Register on Thursday, January 26, 2006 (71 FR 4264). This regulation provides guidance regarding the determination of the basis of stock or securities received in exchange for, or with respect to stock or securities in certain transactions.

DATES: This correction is effective January 23, 2006.

FOR FURTHER INFORMATION CONTACT: Theresa M. Kolish, (202) 622–7530 (not a toll-free number).

SUPPLEMENTARY INFORMATION:

Background

The final and temporary regulations (T.D. 9244, 2006–8 I.R.B. 463) that are the subject of these corrections are under sections 356, 358, and 1502 of the Internal Revenue Code.

Need for Correction

As published, T.D. 9244 contains errors that may prove to be misleading and are in need of clarification.

Correction of Publication

Accordingly, 26 CFR Part 1 is corrected by making the following correcting amendments:

PART 1 — INCOME TAXES

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

Authority: 26 USC 7805 * * *

§1.358–1 [Corrected]

Par. 2. Section 1.358–1 is amended by removing the seventh and eighth sentences of paragraph (b), Example and adding the following sentence in their place to read as follows:

§1.358–1 Basis to distributes.

(a) - - (b) - - Example - - - The basis to A of the one share of stock Corporation Y is $90, that is, the adjusted basis of the one share of stock of Corporation X ($90), decreased by the sum of the cash received ($10) and the fair market value of the other property received ($30) and increased by the sum of the amount treated as a dividend ($5) and the amount treated as a gain from the exchange of property ($35). - * *

§1.358–2 [Corrected]

Par. 3. Section 1.358–2 is amended as follows:

A. By revising paragraph (a)(2)(viii). B. By revising paragraph (2)(ii) paragraph (c) in Examples 4, 5, 6, and 11.

2006–20 I.R.B. 912 May 15, 2006

SUMMARY: This document contain a correction to final regulations (T.D. 9248, 2006–9 I.R.B. 524) that were published in the Federal Register on Tuesday, January 31, 2006 (71 FR 4996) that provide rules for determining bona fide residency in the following U.S. possessions: American Samoa, Guam, the Northern Mariana Islands, Puerto Rico, and the United States Virgin Islands under sections 937(a) and 881(b) of the Internal Revenue Code (Code).

DATES: This correction is effective January 31, 2006.

FOR FURTHER INFORMATION CONTACT: J. David Varley, (202) 435–5262 (not a toll-free number).

SUPPLEMENTARY INFORMATION:

Background

The final regulations (T.D. 9248, 2006–9 I.R.B. 524) that are the subject of this correction are under sections 937(a) and 881(b) of the Internal Revenue Code.

Need for Correction

As published, the final regulations (T.D. 9248) contains an error that may prove to be misleading and is in need of clarification.

Correction of Publication

Accordingly, the publication of the final regulations (T.D. 9248), which were the subject of FR Doc. 06–818, is corrected as follows:

On page 4997, column 2, in the preamble under the paragraph heading “Explanation of Provisions and Summary of Comments”, first paragraph, fourth line from the bottom, the language “tax and closer connection tests is the” is corrected to read “tax home and closer connection test is the”.

LaNita Van Dyke, Federal Register Liaison Officer,

Legal Processing Division,

Associate Chief Counsel (Procedure and Administration).

(Filed by the Office of the Federal Register on March 20, 2006, 8:45 a.m., and published in the issue of the Federal Register for March 21, 2006, 71 F.R. 14099)

section, on or before the date on which the basis of a share of Corporation Y stock received becomes relevant, J may designate which of the shares of Corporation Y stock received have a basis of $2, which have a basis of $4, and which have a basis of $5.

Example 5 . (i) * * * (ii) Analysis. Under paragraph (a)(2)(ii) of this section and under §1.356–1(b), because the terms of the exchange specify that J receives 40 shares of stock of Corporation Y in exchange for J’s shares of Class A stock of Corporation X and $200 of cash in exchange for J’s shares of Class B stock of Corporation X and such terms are economically reasonable, such terms control.” in its place. J realizes a gain of $140 on the exchange of shares of Class A stock of Corporation X, none of which is recognized under §1.356–1(a). J realizes a gain of $80 on the exchange of shares of Class B stock of Corporation X, all of which is recognized under §1.356–1(a). - * *

Example 6 . (i) * * * (ii) Analysis. Under paragraph (a)(2)(ii) of this section and under §1.354–1(a), because the terms of the exchange specify that J receives 10 shares of stock of Corporation Y in exchange for J’s shares of Class A stock of Corporation X and a Corporation Y security in exchange for its Corporation X security and such terms are economically reasonable, such terms control.

- - - Example 11 . (i) * * * (ii) Analysis . Because the value of the common stock indicates that the liquidation preference associated with the Corporation Y preferred stock could be satisfied even if the reorganization did not occur, it is not appropriate to deem the issuance of additional Corporation Y preferred stock.

§1.1502–19T [Corrected]

Section 1.1502–19T is amended by: A. Revising the section heading. B. Revising paragraph (b)(2) through (c).

C. Revising the text of paragraph (h)(2)(iv).

The corrections read as follows:

§1.1502–19T Excess loss accounts (temporary)

(a) through (c) [Reserved]. For further guidance, see §1.1502–19(a) through (c).

- - - (h)(2)(iv) - - - For guidance regarding determinations of the basis of the stock of a subsidiary acquired in and intercompany reorganization on or after January 23, 2006, see paragraphs (d) and (g) Example 2 of this section.

§1.1502–32 [Corrected]

Section 1.1502–32 is amended by revising the text of paragraph (h)(8) to read as follows:

§1.1502–32 Investment adjustments.

- - - (h) - - (h)(8) * * * Paragraph (b)(5)(ii) Exam- ple 6 of this section applies only with respect to determinations of the basis of the stock of a subsidiary on or after January 23, 2006. For determinations of the basis of the stock of a subsidiary before January 23, 2006, see §1.1502–32(b)(5)(ii) Exam- ple 6 as contained in the 26 CFR part 1 edition revised as of April 1, 2005.

Guy R. Traynor, Chief, Publications and

Regulations Branch, Legal Processing Division,

Associate Chief Counsel (Procedure and Administration).

(Filed by the Office of the Federal Register on April 12, 2006, 8:45 a.m., and published in the issue of the Federal Register for April 13, 2006, 71 F.R. 19117)

Residence Rules Involving U.S. Possessions; Correction

Announcement 2006–32

AGENCY: Internal Revenue Service (IRS), Treasury.

ACTION: Correction to final regulations.

May 15, 2006 913 2006–20 I.R.B.

Deletions From Cumulative List of Organizations Contributions to Which are Deductible Under Section 170 of the Code

Announcement 2006–33

The name of an organization that no longer qualifies as an organization described in section 170(c)(2) of the Internal Revenue Code of 1986 is listed below.

Generally, the Service will not disallow deductions for contributions made to a listed organization on or before the date of announcement in the Internal Revenue Bulletin that an organization no longer

qualifies. However, the Service is not precluded from disallowing a deduction for any contributions made after an organization ceases to qualify under section 170(c)(2) if the organization has not timely filed a suit for declaratory judgment under section 7428 and if the contributor (1) had knowledge of the revocation of the ruling or determination letter, (2) was aware that such revocation was imminent, or (3) was in part responsible for or was aware of the activities or omissions of the organization that brought about this revocation.

If on the other hand a suit for declaratory judgment has been timely filed, contributions from individuals and organizations described in section 170(c)(2) that are otherwise allowable will continue to

be deductible. Protection under section 7428(c) would begin on May 15, 2006, and would end on the date the court first determines that the organization is not described in section 170(c)(2) as more particularly set forth in section 7428(c)(1). For individual contributors, the maximum deduction protected is $1,000, with a husband and wife treated as one contributor. This benefit is not extended to any individual, in whole or in part, for the acts or omissions of the organization that were the basis for revocation.

Parents & Friends for

Better Education, Inc. Houma, LA

2006–20 I.R.B. 914 May 15, 2006