SECTION 8. DRAFTING

INFORMATION

The principal author of this notice is Douglas H. Kim of the Office of Associate Chief Counsel (Passthroughs & Special Industries). For further information regarding this notice, contact Mr. Kim at (202) 622–3110 (not a toll-free call).

Weighted Average Interest Rate Update

Notice 2006–80

This notice provides guidance as to the corporate bond weighted average interest rate and the permissible range of interest rates specified under § 412(b)(5)(B)(ii)(II) of the Internal Revenue Code. In addition, it provides guidance as to the interest rate on 30-year Treasury securities under § 417(e)(3)(A)(ii)(II).

CORPORATE BOND WEIGHTED AVERAGE INTEREST RATE

Sections 412(b)(5)(B)(ii) and 412(l)(7) (C)(i), as amended by the Pension Funding Equity Act of 2004 and by the Pension Protection Act of 2006, provide that the interest rates used to calculate current liability and to determine the required contribution under § 412(l) for plan years beginning in 2004 through 2007 must be within a permissible range based on the weighted average of the rates of interest on amounts invested conservatively in long term investment grade corporate bonds during the 4-year period ending on the last day before the beginning of the plan year.

Notice 2004–34, 2004–1 C.B. 848, provides guidelines for determining the corporate bond weighted average interest rate and the resulting permissible range of interest rates used to calculate current liability. That notice establishes that the corporate bond weighted average is based on the monthly composite corporate bond rate derived from designated corporate bond indices. The methodology for determining the monthly composite corporate bond rate as set forth in Notice 2004–34 continues to apply in determining that rate. See Notice 2006–75, 2006–36 I.R.B. 366. The composite corporate bond rate for August 2006 is 6.11 percent. Pursuant to Notice 2004–34, the Service has determined this rate as the average of the monthly yields for the included corporate bond indices for that month.

The following corporate bond weighted average interest rate was determined for plan years beginning in the month shown below.

2006–40 I.R.B. 594 October 2, 2006

Corporate

For Plan Years Bond 90% to 100%

Beginning in: Weighted Permissible Month Year Average Range

September 2006 5.78 5.21 to 5.78

30-YEAR TREASURY SECURITIES INTEREST RATE

Section 417(e)(3)(A)(ii)(II) defines the applicable interest rate, which must be used for purposes of determining the minimum present value of a participant’s benefit under § 417(e)(1) and (2), as the annual rate of interest on 30-year Treasury securities for the month before the date of distribution or such other time as the Secretary may by regulations prescribe. Section 1.417(e)–1(d)(3) of the Income Tax Regulations provides that the applicable interest rate for a month is the annual interest rate on 30-year Treasury securities as specified by the Commissioner for that month in revenue rulings, notices or other guidance published in the Internal Revenue Bulletin.

The rate of interest on 30-year Treasury securities for August 2006 is 5.00 percent. The Service has determined this rate as the monthly average of the daily determination of yield on the 30-year Treasury bond maturing in February 2036.

Drafting Information

The principal authors of this notice are Paul Stern and Tony Montanaro of the Employee Plans, Tax Exempt and Government Entities Division. For further information regarding this notice, please contact the Employee Plans’ taxpayer assistance telephone service at 877–829–5500 (a toll-free number), between the hours of 8:00 a.m. and 6:30 p.m. Eastern time, Monday through Friday. Mr. Stern may be reached at 202–283–9703. Mr. Montanaro may be reached at 202–283–9714. The telephone numbers in the preceding sentences are not toll-free.

Elections Under § 355(b)(3)(C)

Notice 2006–81

This notice provides guidance for making an election under § 355(b)(3)(C) of the Internal Revenue Code.

BACKGROUND

Section 355(b)(3) was enacted on May 17, 2006, as part of the Tax Increase Prevention and Reconciliation Act of 2005, Pub. L. No. 109–222, 120 Stat. 348. Section 355(b)(1) generally provides, in part, that § 355(a) only applies to transactions in which both the distributing corporation and the controlled corporation are engaged in the active conduct of a trade or business immediately after the distribution. Section 355(b)(2) generally provides, in part, that, for purposes of § 355(b)(1), a corporation shall be treated as engaged in the active conduct of a trade or business if and only if such corporation is engaged in the active conduct of a trade or business, or if substantially all of its assets consist of stock and securities of a corporation controlled by it (immediately after the distribution) that is so engaged (the latter phrase hereinafter referred to as the “Holding Company Test”).

New § 355(b)(3)(A) generally provides that, for distributions made after May 17, 2006, and on or before December 31, 2010, a corporation shall be treated as meeting the requirements of § 355(b)(2)(A) if and only if such corporation is engaged in the active conduct of a trade or business. New § 355(b)(3)(B) generally provides that, for purposes of § 355(b)(3)(A), all members of such corporation’s separate affiliated group shall be treated as one corporation. Section 355(b)(3)(B) also provides that a corporation’s separate affiliated group is the affiliated group that would be determined under § 1504(a) if such corporation were the common parent and § 1504(b) did not apply. Thus, in light of the restrictive language in § 355(b)(3), the Holding

Company Test does not apply to any distribution for which § 355(b)(3) applies.

New § 355(b)(3)(C) contains transition rules providing that § 355(b)(3)(A) shall not apply to any distribution made pursuant to a transaction that was: (i) made pursuant to an agreement that was binding on May 17, 2006, and at all times thereafter; (ii) described in a ruling request submitted to the Internal Revenue Service on or before May 17, 2006; or, (iii) described on or before May 17, 2006, in a public announcement or in a filing with the Securities and Exchange Commission. Therefore, corporations whose distributions are described in the preceding sentence and otherwise meet the requirements of § 355 shall be governed under § 355(b)(2)(A) (including the Holding Company Test), notwithstanding the enactment of § 355(b)(3). However, § 355(b)(3)(C) also provides that these corporations may elect not to have the transition rule apply. If one of these corporations elects not to have the transition rule apply, § 355(b)(3)(A) and (B) will apply. Any such election, once made, shall be irrevocable.

The Service has determined that corporations whose transactions are described in the transition rule and who desire taxfree treatment under § 355 will not be required to make an affirmative election under § 355(b)(3)(C), provided that their transaction is described in § 355(b) as in effect either before or after the enactment of § 355(b)(3). Such corporations will be deemed to have satisfied the requirements of § 355(b)(2)(A) or (b)(3), as applicable. However, corporations must make the election described in § 355(b)(3)(C) if the purpose of the election is to disqualify the distribution under § 355(a). Corporations whose transactions are described in the transition rule but do not desire taxfree treatment under § 355 and require § 355(b)(2)(A) to apply to ensure taxable treatment are not required to file the election, but must report the distribution as taxable.

October 2, 2006 595 2006–40 I.R.B.