Part IV. Items — Internal Revenue Bulletin 2006-48

Notice of Proposed Rulemaking

Limitations on Transfers of Built-in Losses

REG–110405–05

AGENCY: Internal Revenue Service (IRS), Treasury.

ACTION: Notice of proposed rulemaking.

SUMMARY: This document contains proposed regulations under section 362(e)(2) of the Internal Revenue Code of 1986 (Code). The proposed regulations reflect changes made to the law by the American Jobs Creation Act of 2004. These proposed regulations provide guidance regarding the determination of the bases of assets and stock transferred in certain nonrecognition transactions and will affect corporations and large shareholders of corporations, including individuals, partnerships, corporations, and tax-exempt entities.

DATES: Written or electronic comments and requests for a public hearing must be received by January 22, 2007.

ADDRESSES: Send submissions to CC:PA:LPD:PR (REG–110405–05), Internal Revenue Service, PO Box 7604, Ben Franklin Station, Washington, DC 20044. Submissions may be hand delivered to CC:PA:LPD:PR (REG–110405–05), Courier’s Desk, Internal Revenue Service, Crystal Mall 4 Building, 1901 S. Bell St., Arlington, VA. Alternatively, taxpayers may submit comments electronically directly to the IRS Internet site at www.irs.gov/regs or Federal e-Rulemaking Portal at www.regulations.gov (IRS REG–110405–05).

FOR FURTHER INFORMATION CONTACT: Concerning the proposed regulations, Jay M. Singer, (202) 622–7530, or concerning submissions of comments, Richard A. Hurst, (202) 622–7180 (not toll-free numbers) or Richard.A.Hurst@irscounsel.treas.gov .

SUPPLEMENTARY INFORMATION:

Background

Prior to 1999, Congress grew concerned that taxpayers were engaging in corporate nonrecognition transactions in order to accelerate and duplicate losses. See S. Rep. No. 201, 106th Cong., 1st Sess. 46–48 (1999). Congress was primarily concerned with the acceleration and duplication of losses through the assumption of liabilities (including liabilities to which assets transferred in a corporate nonrecognition transaction were subject). As a result, in 1999, Congress enacted section 362(d) of the Code to prevent the bases of assets transferred to a corporation from being increased above such assets’ aggregate fair market value as a result of a liability assumption. In addition, in 2000, Congress enacted section 358(h) to reduce the basis of stock received in certain corporate nonrecognition transactions, but not below fair market value, by the amount of any liabilities assumed in the transaction.

Following the enactment of sections 362(d) and 358(h), Congress remained concerned that taxpayers were engaging in various tax-motivated transactions to take more than one tax deduction for a single economic loss. Consequently, in the American Jobs Creation Act of 2004 (Public Law 108–357, 188 Stat. 1418), Congress enacted section 362(e), which limits the ability of taxpayers to duplicate net built-in loss in certain nonrecognition transactions.

Section 362(e)(1)(A) provides that if there would be an importation of a net built-in loss in a transaction described in section 362(a) or (b), the basis of certain property acquired in such a transaction shall be its fair market value immediately after the transaction. Section 362(e)(1)(B) provides that property is described in section 362(e)(1) if gain or loss with respect to such property is not subject to tax in the hands of the transferor immediately before the transfer, and gain or loss with respect to such property is subject to tax in the hands of the transferee immediately after the transfer. Further, section 362(e)(1)(C) provides that there is an importation of net built-in loss in a transaction if the trans

feree’s aggregate adjusted basis in such property would (but for the application of section 362(e)(1)) exceed the aggregate fair market value of such property immediately after the transaction.

Section 362(e)(2)(A) provides that if property is transferred by a transferor to a transferee in a transaction described in section 362(a) and not described in section 362(e)(1), and if the transferee’s aggregate adjusted basis in the transferred property would (but for the application of section 362(e)(2)) exceed its aggregate fair market value immediately after the transfer, then the transferee’s aggregate adjusted basis in the transferred property shall not exceed the fair market value of the property immediately after the transfer. Further, section 362(e)(2)(B) provides that this aggregate reduction in the basis of the transferred property shall be allocated among the property in proportion to their respective built-in losses immediately before the transaction. As an alternative to this reduction in the basis of the transferred assets, section 362(e)(2)(C) provides that if the transferor and the transferee both so elect, section 362(e)(2)(A) shall not apply, and the transferor’s basis in the stock of the transferee received in exchange for the property that would otherwise be subject to basis reduction under section 362(e)(2)(A) shall not exceed its fair market value.

Since the enactment of section 362(e)(2), the IRS and Treasury Department have been exploring issues concerning the interpretation, scope, and application of the section and have proposed these regulations to address these issues. Additional guidance regarding the application of section 362(e)(2) to transfers between members of a consolidated group and the treatment of transactions that have the effect of importing losses into the U.S. tax system (to which section 362(e)(1) applies) will be addressed in separate guidance projects.

Explanation of Provisions

General Provisions

In general, these proposed regulations apply to transfers of net built-in loss property within the U.S. tax system in which the Code otherwise would duplicate the

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tive burden of reconstructing appropriate records may be substantial.

The IRS and Treasury Department have determined that relief is appropriate when transactions are consummated with no plan or intention to enter the U.S. tax system. Thus, if assets are transferred in a transaction that is potentially subject to section 362(e)(2) more than two years before entering the U.S. tax system, then, solely for purposes of section 362(e)(2), these proposed regulations generally presume that the aggregate fair market value of the transferred assets equals their aggregate adjusted basis in the hands of the transferee immediately after the transfer. This presumption applies only if neither the original transfer nor the later entry of any portion of the assets into the U.S. tax system was undertaken with a view to reducing the U.S. tax liability of any person or duplicating loss by avoiding the application of section 362(e)(2).

If a transfer subject to section 362(e)(2) occurs within the two-year period immediately before becoming U.S. tax relevant, the IRS and Treasury Department do not believe that relief from the administrative burden is either necessary or appropriate. Thus, in such a case, the fair market value presumption does not apply, and section 362(e)(2) applies to the original transfer. The proposed regulations provide the relevant parties a means by which to make an election under section 362(e)(2)(C), if desired, at the time of entry into the U.S. tax system.

General Application of Section 362(e)(2) to Reorganizations

Taxpayers have questioned whether a transaction described in both sections 362(a) and 362(b) may be subject to section 362(e)(2). The IRS and Treasury Department believe that, if there is a duplication of loss in a transaction described in section 362(a) (and not subject to section 362(e)(1)), Congressional intent requires that the transaction be recognized as described in section 362(a) notwithstanding that it is also described in section 362(b). The proposed regulations clarify that section 362(e)(2) can apply to such transactions.

net built-in asset loss in the stock of the transferee. Such transfers include exchanges subject to section 351, capital contributions, and transfers of paid-in surplus. However, these proposed regulations do not apply to a transfer where the duplicated loss is imported into the U.S. tax system and the transfer is subject to section 362(e)(1), which addresses certain loss importation transactions. Property is net built-in loss property if the transferee corporation’s aggregate basis in the property, but for the application of section 362(e)(2), would exceed the aggregate fair market value of such property immediately after the transfer.

If section 362(e)(2) applies to a transfer, the transferee corporation receives the property with an aggregate basis not exceeding the aggregate fair market value of the property immediately after the transfer. The transferee allocates the basis reduction among the transferred loss properties in proportion to the amount of loss in each such property immediately before the transfer.

Taxpayers have questioned the effect of any gain taken into account as a result of the transfer. The IRS and Treasury Department have determined that any gain recognized by the transferor that increases the transferee corporation’s basis in the transferred property must be taken into account in order to determine the full amount of loss duplication. Accordingly, these proposed regulations provide that in determining whether the transferred property has a net built-in loss in the hands of the transferee, the bases of such property first must be increased under section 362(a) or (b) for any gain recognized by the transferor on the transfer of the property.

There also have been questions about the application of section 362(e)(2) in the case of multiple transferors. The legislative history to section 362(e)(2) contains some potentially conflicting language that refers to the aggregate adjusted basis of property contributed by a transferor or a control group of which the transferor is a member. See Conf. Rep. No. 108–755, 108th Cong., 2d Sess. 635 (2004). However, because the basis rules in section 362 and section 358 are applied on a transferor-by-transferor basis, applying section 362(e)(2) to an aggregated group of transferors would undermine Congress’ intent

to prevent loss duplication. Further, section 362(e)(2) specifically refers to property “transferred by a transferor.” Accordingly, these proposed regulations clarify that section 362(e)(2) applies separately to each transferor. Thus, each transferor’s transfer is measured separately, and the determination of whether that transfer is subject to these provisions is made solely by reference to the property transferred by such transferor. Consequently, the treatment of one transferor is unaffected by the transfer of property by any other transferor for purposes of section 362(e)(2).

In addition, these proposed regulations clarify that, even if part of a transaction is subject to section 362(e)(1), section 362(e)(2) can apply to the portion of the transaction that is not described in section 362(e)(1).

Application of Section 362(e)(2) to Transfers Outside of the U.S. Tax System

Under general principles of law, the Code applies to all transactions without regard to whether such application has any current U.S. tax consequences. In the case of transfers that are wholly outside the U.S. tax system, section 362(e)(2) applies but does not have relevance unless and until the assets transferred or the stock received in the exchange enter the U.S. tax system. Such assets or stock may subsequently enter the U.S. tax system either directly or indirectly. For example, the assets or stock could directly enter the U.S. tax system through a transfer of all or a portion of such assets or stock to a U.S. person, or as a result of the original transferor or original transferee becoming a U.S. person. Further, the assets or stock could indirectly enter the U.S. tax system, for example, through a transfer of all or a portion of such assets or stock to a CFC, or as a result of the original transferor or original transferee becoming a CFC. However, in many cases the U.S. tax treatment of a transfer that is wholly outside the U.S. tax system will never become relevant. The IRS and Treasury Department recognize that, if a transferor does not anticipate the transfer becoming U.S. tax relevant, it is not likely to undertake the valuation and record-keeping that section 362(e)(2) would generally require. If circumstances change at some later date, the administra

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prevent section 358 from reducing P’s basis in the S stock by the amount of the contingent liabilities, section 362(e)(2)(C) might be interpreted to limit P’s basis in the S stock to $70 (notwithstanding that section 362(e)(2)(A) would only require a $10 reduction in the basis of the assets in the hands of S). Thus, a section 362(e)(2)(C) election might result in a larger basis reduction in the stock than would be required in the assets absent an election.

The IRS and Treasury Department believe that, because section 362(e)(2) is intended to prevent the duplication of net built-in loss in the transferred assets, the amount of basis reduction resulting from an election under section 362(e)(2)(C) should not be any larger than what is necessary to eliminate the duplication of loss in the transferred assets. Therefore, these proposed regulations clarify that the amount of the reduction in the basis of the transferee stock (and securities) as a result of an election to apply section 362(e)(2)(C) is equal to the net built-in loss in the transferred assets in the hands of the transferee. In other words, under the proposed regulations, the amount of the reduction in the basis of the transferee stock (and securities) resulting from such an election equals the amount of the reduction in the basis of the assets required by section 362(e)(2)(A) absent the election.

These proposed regulations also implement Notice 2005–70, 2005–41 I.R.B. 694, see §601.601(d)(2), which instructs taxpayers how to elect to apply section 362(e)(2)(C). These proposed regulations revise and expand upon the procedures in Notice 2005–70 to provide more methods and time periods in which to make the section 362(e)(2)(C) election. Specifically, the regulations expand the classifications of persons who can attach the required election statement to a tax return (including an information return).

The “protective election” referenced in Notice 2005–70 also is included in the proposed regulations because the IRS and Treasury Department anticipate that, at the time of the transaction, taxpayers may not always be able to determine with reasonable certainty whether section 362(e)(2) applies to a transfer.

The IRS and Treasury Department request comments on whether the instructions provided in these proposed regula

Exception for Transactions in Which Net Built-in Loss is Eliminated Without Recognition

In certain transactions, the transferor’s duplicated basis in the transferee stock or securities is eliminated by operation of statute without recognition or benefit. For example, in a transaction meeting the requirements of both sections 351 and 368(a)(1)(D), the transferor ordinarily receives stock with an aggregate basis equal to that of the transferred property. As a result, where the transferred property has a net built-in loss, but for section 362(e)(2), the transferor would receive the transferee stock with an adjusted basis that duplicates the built-in loss in the transferred property. However, if the transferor distributes the transferee stock pursuant to a section 368(a)(1)(D) acquisitive reorganization or pursuant to section 355, no taxpayer will recognize the duplicated loss because the distributee will determine its basis in the transferee stock by reference to its basis in surrendered stock of the transferor.

The IRS and Treasury Department have concluded that, even if a transaction is described in section 362(e)(2), if there is no duplicated loss that can be recognized, section 362(e)(2) should not apply. Accordingly, these proposed regulations provide that section 362(e)(2) will not apply to transactions to the extent that loss duplication is prevented or eliminated where the transferor distributes the transferee stock and/or securities received in the transaction without recognizing gain or loss, and, upon completion of the transaction, no person holds any asset with a basis determined in whole or in part by reference to the transferor’s basis in the transferee stock and/or securities.

Application of Section 362(e)(2) to Transfers in Exchange for Securities

In certain transactions, net built-in loss also can be duplicated in securities received without the recognition of gain or loss. For example, a U.S. transferor duplicates a net built-in loss when it transfers property with a net built-in loss to a U.S. controlled corporation in exchange for stock and securities and all or part of the securities are retained following the distribution of the stock of the controlled corporation pursuant to section 355. Such

a transaction is described in section 362(a) but not section 362(e)(1) and, accordingly, may be subject to section 362(e)(2).

Although the statute is silent about the treatment of securities received in such a property transfer, the IRS and Treasury Department have concluded that Congressional intent would be circumvented if section 362(e)(2) were treated as not applying to both stock and securities received in transactions to which section 362(e)(2) applies. Accordingly, these proposed regulations apply section 362(e)(2) to transfers in exchange for both stock and securities to the extent necessary to eliminate loss duplication.

Because the section applies equally to transfers in exchange for both stock and securities, the IRS and Treasury Department have concluded that taxpayers must be allowed to make an election under section 362(e)(2)(C) for both stock and securities. Accordingly, these proposed regulations allow the transferor and transferee to elect to apply section 362(e)(2)(C) to the transferee stock and securities received in the exchange.

Election to Reduce Stock Basis

Section 362(e)(2)(C) permits transferors and transferees that engage in transactions to which section 362(e)(2) applies to elect to reduce the transferor’s basis in the stock received instead of reducing the transferee corporation’s basis in the property transferred. As described in this preamble, section 362(e)(2)(C) provides that if the election is made, section 362(e)(2)(A) shall not apply, and the transferor’s basis in the transferee stock received in the exchange shall not exceed its fair market value immediately after the exchange. The statutory language might be interpreted to require the transferor to reduce its basis in the stock received by an amount that is larger than the amount by which the transferee otherwise would have been required to reduce its aggregate basis in the assets under section 362(e)(2)(A). For example, assume a corporation, P, contributes a trade or business to a subsidiary, S, in a transaction to which section 351 applies. The assets of the business have an aggregate adjusted basis of $100 and a value of $90, and the business has $20 of associated contingent liabilities. Even if section 358(h)(2)(A) applies to

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lished as final regulations in 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 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 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 regulation has been 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. 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 may be scheduled if requested in writing by any person who timely submits written comments. If a public hearing is scheduled, notice of the date, time, and place of the hearing will be published in the Federal Register .

Drafting Information

The principal authors of these regulations are Jay M. Singer and Filiz A. Serbes of the Office of Associate Chief Counsel (Corporate), 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 proposed to be amended as follows:

tions adequately address the needs of taxpayers. In particular, the IRS and Treasury Department invite comments regarding whether, alternatively, a separate form should be developed and made available to enable taxpayers to make the section 362(e)(2)(C) election prior to and apart from filing it with a U.S. return.

The basis tracing provisions in §1.358–2 apply to certain transfers to which section 351 and either section 354 or section 356 apply. However, the IRS and Treasury Department believe that the basis tracing provisions in §1.358–2 should not apply to a transfer to which section 362(e)(2) also applies if the transferor and transferee make an election to apply section 362(e)(2)(C). The IRS and Treasury Department believe that the statutory language in section 362(e)(2)(C) and the policy of preventing loss duplication precludes the application of the basis tracing provisions because basis tracing could allow the transferor to hold transferee stock or securities with a basis in excess of fair market value even after a reduction under section 362(e)(2)(C). Accordingly, these proposed regulations provide that the provisions of §1.358–2(a)(2) will not apply to a transaction to which section 362(e)(2) applies if the transferor and transferee elect to apply section 362(e)(2)(C). The IRS and Treasury Department request comments regarding whether this treatment is appropriate.

Transfers by Partnerships and S Corporations

The proposed regulations also provide that, where the transferor is a partnership and a section 362(e)(2)(C) election is made, any reduction to the partnership’s basis in the transferee stock received is treated as an expenditure of the partnership, as described in section 705(a)(2)(B). The proposed regulations provide a similar rule applicable to transfers by S corporations that elect to apply section 362(e)(2)(C).

The IRS and Treasury Department are further exploring how the provisions of section 362(e)(2) apply to partnerships. The IRS and Treasury Department invite comments on this general issue and specifically invite comments regarding the transfer of a partnership interest in

exchange for stock in a section 351 transaction to which section 362(e)(2) applies. For example, individuals A and B contribute cash to form a partnership, PRS. PRS purchases property that subsequently decreases in value. A contributes his PRS interest to a corporation in a transaction that qualifies under section 351. PRS does not make an election under section 754. Comments are invited regarding the interaction of section 362(e)(2) and the partnership provisions under these and similar facts.

Application of Section 336(d) to Property Previously Transferred in a Section 362(e)(2) Transaction

Commentators have questioned how section 362(e)(2) interacts with other Code sections. Specifically, some have asked how section 362(e)(2) applies when section 336(d) might be implicated. Section 336(d) provides various limitations on a liquidating corporation’s ability to recognize loss when it distributes property acquired in a section 351 transaction or as a contribution to capital. The IRS and Treasury Department believe that, generally, sections 336(d) and 362(e)(2) are fully compatible where the parties do not make an election to apply section 362(e)(2)(C). However, where an election has been made, the two sections may operate to deny part or all of an economic loss. The IRS and Treasury Department invite comments regarding this issue.

Application to Section 304 Transactions

In response to inquiries, the proposed regulations contain an example demonstrating how section 362(e)(2) applies to a section 351 transaction treated as occurring under section 304. The IRS and Treasury Department are considering whether the regulations should deem an election to apply section 362(e)(2)(C) to have been made in section 304 transactions. The IRS and Treasury Department invite comments regarding this issue.

Proposed Effective Date

These proposed regulations are proposed to apply to transactions occurring after the date these regulations are pub

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(5) Application of section 362(e)(2) to reorganizations . Section 362(e)(2) can apply to a transfer regardless of whether the basis of the property would, but for section 362(e)(2), be determined under section 362(b).

(6) Exception for transactions in which net built-in loss is eliminated without recognition . Section 362(e)(2) does not apply to a transfer of property to the extent that—

(i) The transferor distributes, without recognizing gain or loss, all of the transferee stock received in exchange for the transferred property; and

(ii) Upon completion of the transaction, no person holds transferee stock or any other asset with a basis determined in whole or in part by reference to the transferor’s basis in the transferee stock.

(7) Transfers where neither party is a U.S. person, a person otherwise re- quired to file a U.S. return, or a CFC . If property is transferred in a transaction described in section 362(a) but not section 362(e)(1), then, solely for purposes of section 362(e)(2), the aggregate fair market value of the transferred property shall be deemed to equal the aggregate adjusted basis of such property in the hands of the transferee immediately after the transfer if—

(i) Neither party to the transfer was a United States (U.S.) person (as defined in section 7701(a)(30)) on the date of the transfer;

(ii) Neither party to the transfer was required to file a return of tax under Subtitle A of the Internal Revenue Code (including an information return) for the year of the transfer;

(iii) Neither party to the transfer was a controlled foreign corporation (CFC), as defined in section 957, on the date of the transfer;

(iv) The transfer occurred more than two years prior to the date on which the transferor, transferee, or transferred assets are first described in paragraph (c)(5)(iii) of this section; and

(v) Neither the transfer nor the later entry into the U.S. tax system was entered into with a view to reducing the U.S. Federal income tax liability of any person or duplicating loss by avoiding the application of section 362(e)(2).

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 1.362–4 also issued under 26 U.S.C. 362. - * * Par. 2. Section 1.358–2 is amended by revising paragraphs (a)(2)(viii) and adding a new sentence at the end of paragraph (d) to 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 either 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, the shareholder or security holder exchanges property for stock or securities to which it elects to apply section 362(e)(2)(C), or liabilities of the shareholder or security holder are assumed.

- - - (d) - - - Paragraph (a)(2)(viii) of this section applies to exchanges and distributions of stock occurring after the date these regulations are published as final regulations in the Federal Register .

Par. 3. In §1.362–3, the section heading is added and reserved to read as follows:

§1.362–3 Limitations on loss importation.

[Reserved].

Par. 4. Section 1.362–4 is added to read as follows:

§1.362–4 Limitations on built-in loss duplication.

(a) Purpose and scope . The purpose of this section is to prevent the duplication of net built-in loss in transactions described in section 362(e)(2). Section 362(e)(2) applies to transfers of net built-in loss property described in section 362(a) but only to the extent not described in section 362(e)(1).

(b) Application —(1) In general . If property is transferred in any transaction described in section 362(a) but not section 362(e)(1), and, in the hands of the transferee, the transferred property would otherwise have a net built-in loss immediately after the transfer, then the transferee corporation receives such property with an aggregate adjusted basis not exceeding the aggregate fair market value of such property immediately after the transfer. If multiple built-in loss properties are transferred, the aggregate reduction in basis shall be allocated among the built-in loss properties so transferred in proportion to the relative amount of built-in loss in each property.

(2) Multiple transferors . If more than one transferor transfers property to a corporation in a transaction described in section 362(a), whether and the extent to which this section applies is determined separately for each transferor.

(3) Transactions described in section 362(e)(1) . A transfer of property to a corporation is described in section 362(e)(1) only if and to the extent that the transferred property described in section 362(e)(1)(B) (section 362(e)(1)(B) property) would otherwise have a net built-in loss in the hands of the transferee. Thus, if a transferor transfers net built-in loss section 362(e)(1)(B) property together with property not described in section 362(e)(1)(B), the transfer of the net built-in loss section 362(e)(1)(B) property is described in section 362(e)(1). Accordingly, the net built-in loss section 362(e)(1)(B) property is not taken into account for purposes of determining whether section 362(e)(2) applies to the transfer of the other property. Alternatively, if a transferor transfers net built-in gain section 362(e)(1)(B) property together with property not described in section 362(e)(1)(B), no portion of the transfer is described in section 362(e)(1).

(4) Net built-in loss - (i) In general . Transferred property has a net built-in loss if its aggregate adjusted basis exceeds its aggregate fair market value.

(ii) Basis adjustments for gain recog- nized on the transfer . For purposes of determining whether the transferred property has a net built-in loss in the hands of the transferee, the bases of such property first must be increased under section 362(a) or (b) for any gain recognized by the transferor on the transfer of such property.

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feree is a U.S. person on the date of the transfer or otherwise required to make a return of tax under Subtitle A of the Internal Revenue Code (including an information return) for the year of the transfer, the election statement is filed by including the following statement on or with the transferee’s timely filed original return (including extensions) for the taxable year in which the transfer occurred: “[insert name and tax identification number of transferee] certifies that [insert name and tax identification number, if any, of transferor] and [insert name and tax identification number of transferee] elect to apply section 362(e)(2)(C) with respect to a transfer of property described in section 362(e)(2)(A) on [insert date(s) of transfer(s)].”

(D) Transferor is not a U.S. person on the date of the transfer, a person otherwise required to file a U.S. return for the year of the transfer, or a CFC on the date of the transfer, and transferee is a CFC on the date of the transfer . If the transferor is not described in paragraph (c)(5)(ii)(A) or (c)(5)(ii)(B) of this section, and, on the date of the transfer, the transferee is a CFC that is not required to make a return of tax under Subtitle A of the Internal Revenue Code (including an information return) for the year of the transfer, the election statement is filed by including the following statement on or with the timely filed original return (including extensions) of each one of the transferee’s controlling U.S. shareholders as defined in §1.964–1(c)(5) for the taxable year within which the transfer occurred: “[insert name and tax identification number of controlling U.S. shareholder filing return] certifies that [insert name and tax identification number, if any, of transferor] and [insert name and tax identification number, if any, of transferee (the CFC)] elect to apply section 362(e)(2)(C) with respect to a transfer of property described in section 362(e)(2)(A) on [insert date(s) of transfer(s)]. [insert name(s) and tax identification number(s) of any other controlling U.S. shareholder(s) of the CFC, or, if none, state that there are no other controlling U.S. shareholders of the CFC].”

(iii) Election where neither the trans- feror nor the transferee is a U.S. person on the date of the transfer, a person oth- erwise required to file a U.S. return for the year of the transfer, or a CFC on the date

sis —(1) In general . If section 362(e)(2) applies to a transfer, the transferor and the transferee may make a joint election to reduce the transferor’s basis in the transferee stock instead of reducing the transferee’s basis in the property received under paragraph (b) of this section. Once made, the election is irrevocable. If the election is made, the transferor’s basis in the transferee stock is reduced upon receipt by the transferor. The transferor and the transferee may make a protective election under this section, which will have no effect if section 362(e)(2) does not apply to the transfer, but which will otherwise be binding and irrevocable.

(2) Stock and securities to which this section applies . For purposes of this section, the term stock means stock and securities received without the recognition of gain or loss in a transaction to which section 362(e)(2) applies. See, for example, transactions described in sections 368(a)(1)(D) and 355. (3) Amount of basis reduction . If an election is made pursuant to paragraph (c)(1) of this section, the amount of the basis reduction in the transferee stock received by the transferor in the transaction is equal to the total amount by which the aggregate basis of the transferred property would have been reduced under paragraph (b) of this section had such election not been made.

(4) Allocation of basis reduction . The transferor shall allocate the amount of the basis reduction under this paragraph (c) among all transferee stock received in the transaction in proportion to fair market value.

(5) Procedures for making the elec- tion —(i) In general . To make an election to apply section 362(e)(2)(C)—

(A) Prior to filing the election statement as described in paragraph (c)(5)(ii) or (c)(5)(iii) of this section, the transferor and transferee must execute a written, binding agreement electing to apply section 362(e)(2)(C); and (B) An election statement must be filed pursuant to paragraph (c)(5)(ii) or (c)(5)(iii) of this section.

(ii) Election statement where the trans- feror or transferee is a U.S. person, a per- son otherwise required to file a U.S. return for the year of the transfer, or a CFC on the date of the transfer —(A) Transferor is a U.S. person or a person otherwise re-

quired to file a U.S. return for the year of the transfer . If the transferor is a U.S. person on the date of the transfer or a person otherwise required to make a return of tax under Subtitle A of the Internal Revenue Code (including an information return) for the year of the transfer, the election statement is filed by including the following statement on or with the transferor’s timely filed original return (including extensions) for the taxable year in which the transfer occurred: “[insert name and tax identification number of transferor] certifies that

[insert name and tax identification number of transferor] and [insert name and tax identification number, if any, of transferee] elect to apply section 362(e)(2)(C) with respect to a transfer of property described in section 362(e)(2)(A) on [insert date(s) of transfer(s)].”

(B) Transferor is a CFC on the date of the transfer . If, on the date of the transfer, the transferor is a CFC that is not required to make a return of tax under Subtitle A of the Internal Revenue Code (including an information return) for the year of the transfer, the election statement is filed by including the following statement on or with the timely filed original return (including extensions) of each one of the transferor’s controlling U.S. shareholders, as defined in §1.964–1(c)(5), for the taxable year within which the transfer occurred: “[insert name and tax identification number of controlling U.S. shareholder filing return] certifies that [insert name and tax identification number, if any, of transferor (the CFC)] and [insert name and tax identification number, if any, of transferee] elect to apply section 362(e)(2)(C) with respect to a transfer of property described in section 362(e)(2)(A) on [insert date(s) of transfer(s)]. [insert name(s) and tax identification number(s) of any other controlling U.S. shareholder(s) of the CFC, or, if none, state that there are no other controlling U.S. shareholders of the CFC].”

(C) Transferor is not a U.S. person on the date of the transfer, a person otherwise required to file a U.S. return for the year of the transfer, or a CFC on the date of the transfer, and transferee is a U.S. per- son on the date of the transfer or a person otherwise required to file a U.S. return for the year of the transfer . If the transferor is not described in paragraph (c)(5)(ii)(A) or (c)(5)(ii)(B) of this section and the trans

November 27, 2006 1009 2006–48 I.R.B.

tifies that [insert name and tax identification number, if any, of transferor] and [insert name and tax identification number, if any, of transferee] elect to apply section 362(e)(2)(C) with respect to a transfer of property described in section 362(e)(2)(A) on [insert date(s) of transfer(s)].”

( 2 ) If no person described in paragraph (c)(5)(iii)(C)( 1 ) of this section has acquired any portion of the section 362(e)(2) assets or section 362(e)(2) stock, and a CFC not required to make a return of tax under Subtitle A of the Internal Revenue Code (including an information return) later acquires, in a transferred basis transaction, any portion of the section 362(e)(2) assets or section 362(e)(2) stock, the election statement is filed by including the following statement on or with each of the CFC’s controlling U.S. shareholders’ timely filed original returns (including extensions) for the taxable year within which the CFC first acquires any portion of the section 362(e)(2) assets or section 362(e)(2) stock: “[insert name and tax identification number of controlling U.S. shareholder filing return] certifies that [insert name and tax identification number, if any, of transferor] and [insert name and tax identification number, if any, of transferee] elect to apply section 362(e)(2)(C) with respect to a transfer of property described in section 362(e)(2)(A) on [insert date(s) of transfer(s)]. [insert name(s) and tax identification number(s) of any other controlling U.S. shareholder(s) of the CFC, or, if none, state that there are no other controlling U.S. shareholders of the CFC].”

(6) Transfers by partnerships . If the transferor is a partnership, for purposes of applying section 705 (determination of basis of partner’s interest), any reduction under this section to the transferor’s basis in the stock received in exchange for the transferred property is treated as an expenditure of the partnership described in section 705(a)(2)(B).

(7) Transfers by S corporations . If the transferor is an S corporation, for purposes of applying section 1367 (adjustments to basis of stock of shareholders, etc.), any reduction under this section to the transferor’s basis in the stock received in exchange for the transferred property is treated as an expense of the S corporation described in section 1367(a)(2)(D).

of the transfer . If the parties to a transfer to which section 362(e)(2) applies are not described in any of the classifications set forth in paragraph (c)(5)(ii) of this section, then the election statement under this paragraph (c) is made as described in this paragraph (c)(5)(iii).

(A) Transferor later becomes a U.S. person, a person otherwise required to file a U.S. return, or a CFC . If the transferor later becomes a U.S. person, a person otherwise required to make a return of tax under Subtitle A of the Internal Revenue Code (including an information return), or a CFC, an election statement under this paragraph (c) is filed as described in this paragraph (c)(5)(iii)(A).

( 1 ) If the transferor becomes a U.S. person or a person otherwise required to make a return of tax under Subtitle A of the Internal Revenue Code (including an information return), the election statement is filed by including the statement described in paragraph (c)(5)(ii)(A) of this section on or with the transferor’s timely filed original return (including extensions) for the taxable year in which the transferor first becomes a U.S. person or a person otherwise required to make a return.

( 2 ) If the transferor becomes a CFC that is not required to make a return of tax under Subtitle A of the Internal Revenue Code (including an information return), the election statement is filed by including the statement described in paragraph (c)(5)(ii)(B) of this section on or with the timely filed original return (including extensions) of each one of the transferor’s controlling U.S. shareholders, as defined in §1.964–1(c)(5), for the taxable year within which the transferor becomes a CFC.

(B) Transferee later becomes a U.S. person, a person otherwise required to file a U.S. return, or a CFC . If the transferor is not described in paragraph (c)(5)(iii)(A) of this section, and the transferee later becomes a U.S. person, a person otherwise required to make a return of tax under Subtitle A of the Internal Revenue Code (including an information return), or a CFC, an election statement under this paragraph (c) is filed as described in this paragraph (c)(5)(iii)(B).

( 1 ) If the transferee becomes a U.S. person or a person otherwise required to make a return of tax under Subtitle A of the Internal Revenue Code (including an infor

mation return), the election statement is filed by including the statement described in paragraph (c)(5)(ii)(C) of this section on or with the transferee’s timely filed original return (including extensions) for the taxable year in which the transferee first becomes required to make a return.

( 2 ) If the transferee becomes a CFC that is not required to make any return of tax under Subtitle A of the Internal Revenue Code (including an information return), the election statement is filed by including the statement described in paragraph (c)(5)(ii)(D) of this section on or with the timely filed original return (including extensions) of each one of the transferee’s controlling U.S. shareholders as defined in §1.964–1(c)(5) for the taxable year within which the transferee becomes a CFC.

(C) A U.S. person, a person other- wise required to file a U.S. return, or a CFC later acquires the transferred assets or transferee stock in a transferred ba- sis transaction . If neither the transferor nor the transferee is described in paragraph (c)(5)(iii)(A) or (c)(5)(iii)(B) of this section and a U.S. person, a person otherwise required to make a return of tax under Subtitle A of the Internal Revenue Code (including an information return), or a CFC not required to make a return of tax under Subtitle A of the Internal Revenue Code (including an information return) later acquires, in a transferred basis transaction, any portion of the assets that were transferred in a prior transaction to which section 362(e)(2) applied (section 362(e)(2) assets) or stock of the transferee corporation received in such prior transaction (section 362(e)(2) stock), then the election statement under this paragraph (c) is filed as described in this paragraph (c)(5)(iii)(C).

( 1 ) If a U.S. person or a person otherwise required to make a return of tax under Subtitle A of the Internal Revenue Code (including an information return) later acquires, in a transferred basis transaction, any portion of the section 362(e)(2) assets or section 362(e)(2) stock, the election statement is filed by including the following statement on or with such acquiror’s timely filed original return (including extensions) for the taxable year in which the acquiror first acquires any portion of the section 362(e)(2) assets or section 362(e)(2) stock: “[insert name and tax identification number of the acquiror] cer

2006–48 I.R.B. 1010 November 27, 2006

(d) Examples . The following examples illustrate paragraphs (a) through (c) of this section. Unless otherwise indicated, all transferred property is subject to tax under Subtitle A of the Internal Revenue Code in the hands of the transferor, and, accordingly, section 362(e)(1) does not apply to the transaction. In addition, all assets are capital assets in the hands of the transferor and have been held for more than one year.

Example 1 . Property transfer qualifying under section 351 . (i) Facts . Individual A owns Asset 1 with a basis of $90 and a fair market value of $60, and Asset 2 with a basis of $110 and a fair market value of $120. In a transaction qualifying under section 351, A transfers Asset 1 and Asset 2 to newly formed corporation X in exchange for all of the X common stock. A and X do not elect to apply section 362(e)(2)(C) to reduce A’s basis in the X stock received.

(ii) Analysis . Under section 362(a), X would otherwise receive Asset 1 and Asset 2 with an aggregate basis of $200 ($90+$110), which exceeds their aggregate fair market value of $180 ($60+$120). As a result, the assets have a net built-in loss of $20, and this section applies to the transfer. Under paragraph (b)(1) of this section, X reduces its basis in Asset 1 by $20 to $70 and, under section 362(a), takes a basis in Asset 2 of $110. Under section 358(a), A receives X stock with a basis of $200.

(iii) Election to apply section 362(e)(2)(C) . The facts are the same as in paragraph (i) of this Exam- ple 1, except that A and X elect to apply section 362(e)(2)(C) to reduce A’s basis in the X stock received. Under paragraph (c)(3) of this section, A reduces its basis in the X stock received by the amount X would have been required to reduce its basis in the transferred assets had the election to apply section 362(e)(2)(C) not been made. Accordingly, A receives X stock with an aggregate basis of $180, and, under section 362(a), X receives Asset 1 with a basis of $90 and Asset 2 with a basis of $110.

Example 2 . Property transfer qualifying under section 351 and described in section 368(a)(1)(B) . (i) Facts . Corporation P owns all of the outstanding stock of corporations S1 and S2. In a transaction qualifying under section 351 and described in section 368(a)(1)(B), P transfers all 10 shares of its S2 stock to S1 in exchange for an additional 10 shares of S1 voting stock. At the time of the transfer, each share of the S2 stock has a basis of $10 and a fair market value of $7. P and S1 do not elect to apply section 362(e)(2)(C) to reduce P’s basis in its S1 stock. (ii) Analysis . Under section 362, S1 would otherwise receive the 10 shares of S2 stock with a basis of $10 per share, which exceeds their fair market value of $7 per share. As a result, the S2 stock has a net built-in loss of $30, and this section applies to the transfer. Under paragraph (b)(1) of this section, S1 reduces its basis in the S2 stock by $30 to $70. Under section 358(a), P receives the additional 10 shares of S1 stock with a basis of $10 per share.

(iii) Election under section 362(e)(2)(C) . (A) The facts are the same as in paragraph (i) of this Exam- ple 2, except that P and S1 elect to apply section 362(e)(2)(C) to reduce P’s basis in its S1 stock received. Under paragraph (c)(3) of this section, P reduces its basis in the S1 stock received by the amount

S1 would have been required to reduce its basis in the transferred S2 stock had the election to apply section 362(e)(2)(C) not been made. Accordingly, under paragraph (c)(4) of this section, P receives the additional 10 shares of S1 stock each with a basis of $7. Under section 362, S1 receives the 10 shares of S2 stock each with a basis of $10.

(B) The facts are the same as in paragraph (i) of this Example 2, except that five shares of the S2 stock have a basis of $10 each, five shares have a basis of $5 each, and P and S1 elect to apply section 362(e)(2)(C) to reduce P’s basis in its S1 stock. The $75 ((5 X $10) + (5 x $5)) aggregate basis in the S2 stock exceeds the $70 aggregate fair market value of the S2 stock, and this section applies to the transfer. Under paragraph (c)(3) of this section, P reduces its basis in the S1 stock received by the amount S1 would have been required to reduce its basis in the transferred S2 stock had the election to apply section 362(e)(2)(C) not been made. Accordingly, under paragraph (c)(4) of this section and §1.358–2(a)(2)(viii), P receives the additional 10 shares of S1 stock each with a basis of $7. Under section 362, S1 receives five shares of the S2 stock with a basis of $10 each and five shares of the S2 stock with a basis of $5 each.

Example 3 . Property transfer qualifying under section 351 and described in section 368(a)(1)(A) . (i) Facts . Individual A owns all of the outstanding stock of corporation X and corporation Y, which owns Asset 1 with an adjusted basis of $250 and a fair market value of $210. A also owns Asset 2 with an adjusted basis of $120 and a fair market value of $130. In a transaction qualifying as a reorganization described in section 368(a)(1)(A), Y merges with and into X. Pursuant to the same plan, A transfers Asset 2 to X in exchange for additional X stock. Y’s transfer of Asset 1 to X in the merger coupled with A’s transfer of Asset 2 to X in exchange for X stock qualifies as a section 351 contribution.

(ii) Analysis . Under paragraph (b)(2) of this section, the potential application of section 362(e)(2) is determined separately for each transferor. Y is treated as having transferred Asset 1 to X in exchange for X stock, and X would otherwise take Asset 1 with a basis of $250, which exceeds its fair market value of $210. As a result, Asset 1 has a built-in loss of $40. Under paragraph (b)(6) of this section, section 362(e)(2) does not apply to Y’s transfer of property to X because Y distributes all of the X stock received in the exchange without recognizing gain or loss pursuant to section 361(c), and, upon completion of the transaction, no person holds X stock or any other asset with a basis determined in whole or in part by reference to Y’s basis in the X stock received in the exchange. As a result, under section 362, X receives Asset 1 with a basis of $250. A’s transfer of Asset 2 to X is not subject to section 362(e)(2) because X receives Asset 2 with a basis of $120, which is less than its fair market value of $130.

Example 4 . Property transfers qualifying under section 351 and described in section 368(a)(1)(D), followed by a section 355 distribution . (i) Facts . Individual A and individual B each own 50 percent of corporation X. X owns Asset 1 with an adjusted basis of $120 and a fair market value of $70, Asset 2 with an adjusted basis of $160 and a fair market value of $110, and Asset 3 with an adjusted basis of $220 and a fair market value of $240. In a transaction qualifying under section 351(a) and described in section

368(a)(1)(D), X transfers Asset 1, Asset 2, and Asset 3 to Y, a newly formed corporation, in exchange for all of the Y stock, and then distributes all of the Y stock to A in exchange for all of A’s X stock in a distribution qualifying under section 355. At the time of the transaction, A has no plan or intention to dispose of his Y stock, and B has no plan or intention to dispose of his X stock.

(ii) Analysis . The aggregate adjusted basis of the properties transferred to Y ($120+$160+$220=$500) exceeds their aggregate fair market value ($70+$110+$240=$420). As a result, the assets have a total net built-in loss of $80. Under paragraph (b)(6) of this section, section 362(e)(2) does not apply to this transfer of property because X distributes all of the Y stock received in the exchange without recognizing gain or loss under section 361(c), and, upon completion of the transaction, no person holds Y stock or any other asset with a basis determined in whole or in part by reference to X’s basis in the Y stock received in the exchange. A’s basis in the Y stock is determined under section 358 by reference to his basis in the X stock he surrenders.

(iii) Section 355(e) . (A) The facts are the same as in paragraph (i) of this Example 4, except that, one year after the section 355 distribution, Y is acquired pursuant to a plan, resulting in the application of section 355(e) to the transaction. X and Y do not elect to apply section 362(e)(2)(C).

(B) Analysis . Due to the application of section 355(e), section 361(c) will not apply and X will not be granted nonrecognition treatment on the distribution of the Y stock. As a result, paragraph (b)(6) of this section does not apply, and section 362(e)(2) applies to X’s transfer of assets to Y. Under paragraph (b)(1) of this section, Y reduces its basis in Asset 1 and Asset 2 by the amount of the net built-in loss in the transferred assets, or $80 ($500 $420). The $80 basis reduction is allocated between Asset 1 and Asset 2 in proportion to their respective built-in losses. Prior to reduction, Asset 1 had a built-in loss of $50 ($120 $70), and Asset 2 had a built-in loss of $50 ($160 $110). As a result, the basis of Asset 1 is reduced by $40 (50/100 x $80), and the basis of Asset 2 is reduced by $40 (50/100 x $80), and Y receives Asset 1 with a basis of $80 ($120 $40) and Asset 2 with a basis of $120 ($160 $40). (iv) Retained stock and securities without a sec- tion 362(e)(2)(C) election . (A) The facts are the same as in paragraph (i) of this Example 4, except that X transfers Asset 1, Asset 2, and Asset 3 to Y in exchange for an equal amount of Y stock and Y securities. For a valid business purpose, X retains Y stock and Y securities each worth 1 percent of the total consideration. X and Y do not elect to apply section 362(e)(2)(C).

(B) Analysis . The aggregate basis of the properties transferred ($120+$160+$220=$500) exceeds their aggregate fair market value ($70+$110+$240=$420) by $80 ($500 $420), and this section applies to the transfer. Under paragraph (b)(6) of this section, section 362(e)(2) applies to X’s transfer of assets to Y in exchange for the Y stock and the Y securities to the extent X does not distribute the Y stock and Y securities without the recognition of gain or loss. Accordingly, section 362(e)(2)(A) applies to the extent property was exchanged for the retained Y stock and Y securities (2 percent of the total). Under paragraph (b)(1) of

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this section, Y reduces its basis in Asset 1 and in Asset 2 by 2 percent of the amount of the net built-in loss in the transferred assets ($80), or $1.60. The $1.60 basis reduction is allocated between Asset 1 and Asset 2 in proportion to their respective built-in losses before reduction under paragraph (b)(1) of this section. Prior to reduction, Asset 1 had a built-in loss of $50 ($120 $70), and Asset 2 had a built-in loss of $50 ($160 $110). As a result, the basis of Asset 1 is reduced by $.80 (50/100 x $1.60), the basis of Asset 2 is reduced by $.80 (50/100 x $1.60), and Y receives Asset 1 with a basis of $119.20 ($120 $.80) and Asset 2 with a basis of $159.20 ($160 $.80). (v) Retained stock and securities with a section 362(e)(2)(C) election . (A) The facts are the same as in paragraph (iv)(A) of this Example 4, except that X and Y elect to apply section 362(e)(2)(C) to reduce X’s basis in its retained Y stock and retained Y securities.

(B) Analysis . Under paragraph (b)(6) of this section, section 362(e)(2) applies to X’s transfer of assets to Y in exchange for the Y stock and the Y securities to the extent X does not distribute the Y stock and Y securities without the recognition of gain or loss. Under paragraph (c) of this section, the election to apply section 362(e)(2)(C) applies to both the retained Y stock and the retained Y securities. Accordingly, under paragraph (c)(3) of this section, X reduces its basis in the retained Y stock and the retained Y securities by the amount Y would have been required to reduce its basis in the transferred assets had the election to apply section 362(e)(2)(C) not been made. As described in paragraph (iv)(B) of this Example 4, under paragraphs (b)(1) and (b)(6) of this section, Y would have been required to reduce its basis in the transferred assets by $1.60. Accordingly, X is required to reduce its basis in the retained Y stock and Y securities by $1.60, and, under paragraph (c)(4) of this section, this $1.60 basis reduction is allocated between the retained Y stock and Y securities in proportion to fair market value. Because X retained Y stock and Y securities with equal values, X holds the retained Y stock with an adjusted basis of $1.70 ((($500/2) x .01) $.80) and the retained Y securities with an adjusted basis of $1.70 ((($500/2) x .01) $.80). Example 5 . Transfer of contingent liabilities sub- ject to section 358(h)(2)(A) with section 362(e)(2)(C) election . (i) Facts . Corporation P owns Asset 1 with a basis of $800 and a fair market value of $700. Asset 1 constitutes a trade or business for purposes of section 358(h)(2)(A). Contingent liabilities of $200 are associated with the Asset 1 business. P transfers Asset 1 to newly formed corporation S in exchange for all of the S stock and assumption of the contingent liabilities in a transaction qualifying under section 351. P and S elect to apply section 362(e)(2)(C).

(ii) Analysis . Under section 362(a), S would otherwise receive Asset 1 with a basis of $800, which exceeds it fair market value of $700. As a result, Asset 1 has a net built-in loss of $100, and this section applies to the transfer. Under paragraph (c)(3) of this section, P reduces its basis in the S stock received by the amount S would have been required to reduce its basis in Asset 1 had the election to apply section 362(e)(2)(C) not been made ($100). Accordingly, A receives S stock with an aggregate basis of $700, and, under section 362(a), S receives Asset 1 with a basis of $800.

Example 6 . Property transfer qualifying under section 351 with boot . (i) Facts . Individual A owns Asset 1 with a basis of $80 and a fair market value of $100, and Asset 2 with a basis of $30 and a fair market value of $25. In a transaction qualifying under section 351, A transfers Asset 1 and Asset 2 to newly formed corporation N in exchange for 10 shares of N stock and $25. A and N do not elect to apply section 362(e)(2)(C) to reduce A’s basis in the N stock received.

(ii) Analysis . Under paragraph (b)(4)(iii) of this section, for purposes of determining whether the transferred property has a net built-in loss in the hands of the transferee, the transferee’s basis in the transferred property must be adjusted for any gain recognized by the transferor on the transfer. Section 351(b) requires transferors in transactions otherwise qualifying under section 351(a) for nonrecognition treatment to recognize gain (but not loss) to the extent the transferor receives other property or money in addition to the stock permitted to be received. For purposes of computing the amount of gain recognized under section 351(b), the consideration is allocated pro rata among the transferred properties according to their fair market values. As a result, to compute the amount of gain recognized on the transfer, A is treated as having received eight shares of N stock and $20 in exchange for Asset 1, and two shares of N stock and $5 in exchange for Asset 2. Under section 351(b), A must recognize $20 of gain for the cash received in exchange for Asset 1. Thus, under section 362(a), N would otherwise have a basis of $100 in Asset 1 and $30 in Asset 2. N’s total basis in Asset 1 and Asset 2 of $130 ($100 + $30) would exceed the total fair market value of Asset 1 and Asset 2 of $125 ($100 + $25). As a result, this section applies to the transfer. Under paragraph (b)(1) of this section, N reduces its basis in Asset 2 by $5 to $25 and, under section 362(a), takes a basis in Asset 1 of $100. Under section 358(a), A receives N stock with a basis of $105.

Example 7 . Property transfer subject to both sec- tions 362(e)(1) and 362(e)(2) . (i) Facts . Foreign corporation FP transfers Asset 1 and Asset 2 to a domestic corporation DS in a transaction that qualifies under section 351. Asset 1 is not property described in section 362(e)(1)(B) and has a basis of $80 and a fair market value of $50. Asset 2 is property described in section 362(e)(1)(B) and has a basis of $120 and a value of $110. Section 367(b) does not apply to the transfer of Asset 1 or Asset 2.

(ii) Analysis . Under paragraphs (b)(1) and (b)(3) of this section, a transfer is described in section 362(e)(1), and thus not subject to this section, only if and to the extent there is a transfer of property described in section 362(e)(1)(B) that otherwise would have a net built-in loss in the hands of the transferee. Because Asset 2 is property described in section 362(e)(1)(B) and DS would otherwise receive Asset 2 with a basis of $120 and a value of $110, FP’s transfer of property to DS is described in section 362(e)(1) only to the extent of the transfer of Asset 2. Asset 1 is not property described in section 362(e)(1)(B), and under section 362(a), DS would receive Asset 1 with a basis ($80) in excess of its fair market value ($50). Accordingly, this section applies solely to the transfer of Asset 1. Under paragraph (b)(1) of this section, DS reduces its basis in Asset 1

by $30 to $50. Under section 358(a), FP receives the DS stock with a basis of $200.

Example 8 . Section 304 sale of built-in loss stock . (i) Facts . Individual A owns all the stock of corporation X and corporation Y. A sells all his X stock to Y for $60. Under section 304, A is treated as though he transferred the X stock to Y in exchange for Y stock in a transaction to which section 351 applies. Then, Y is treated as redeeming the Y stock it was treated as having issued to A in the section 351 transaction. At the time of the transaction, A holds X stock with a basis of $90 and a fair market value of $60. A and Y do not elect to apply section 362(e)(2)(C) to reduce A’s basis in the Y stock deemed received.

(ii) Analysis . Under section 362(a), Y would otherwise receive X stock with an aggregate basis of $90, which exceeds its aggregate fair market value of $60. As a result, the X stock has a net built-in loss of $30, and, under paragraph (b)(1) of this section, Y reduces its basis in the X stock received by $30 to $60. Under section 358(a), A receives the deemed issued Y stock with a basis of $90.

(e) Effective date . This section applies to transactions occurring after the date these regulations are published as final regulations in the Federal Register .

Par. 5. Section 1.705–1(a)(9) is added to read as follows:

§1.705–1 Determination of basis of partner’s interest.

(a) * - (9) For basis adjustments necessary to coordinate sections 705 and 362(e)(2), see §1.362–4(c)(6).

- - - Par. 6. In §1.1367–1, a new sentence is added at the end of paragraph (c)(2) to read as follows:

§1.1367–1 Adjustments to basis of shareholder’s stock in an S corporation.

- - - (c) * - (2) - - - For basis adjustments necessary to coordinate sections 1367 and 362(e)(2), see §1.362–4(c)(7).

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

(Filed by the Office of the Federal Register on October 20, 2006, 8:45 a.m., and published in the issue of the Federal Register for October 23, 2006, 71 F.R. 62067)

2006–48 I.R.B. 1012 November 27, 2006

Notice of Proposed Rulemaking by Cross-Reference to Temporary Regulations and Notice of Public Hearing

TIPRA Amendments to Section 199

REG–127819–06

AGENCY: Internal Revenue Service (IRS), Treasury.

ACTION: Notice of proposed rulemaking by cross-reference to temporary regulations and notice of public hearing.

SUMMARY: In this issue of the Bulletin, the IRS is issuing temporary regulations (T.D. 9293) concerning the application of section 199 of the Internal Revenue Code, which provides a deduction for income attributable to domestic production activities. The text of those regulations also serves as the text of these proposed regulations. This document also provides notice of a public hearing on these proposed regulations.

DATES: Written or electronic comments must be received by January 17, 2007. Outlines of topics to be discussed at the public hearing scheduled for February 5, 2007, must be received by January 16, 2007.

ADDRESSES: Send submissions to: CC:PA:LPD:PR (REG–127819–06), 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 8:00 a.m. and 4:00 p.m. to CC:PA:LPD:PR (REG–127819–06), Internal Revenue Service, Crystal Mall 4 Building, 1901 S. Bell St., Arlington, VA, 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–127819–06). The public hearing will be held in the auditorium of the New Carrollton Federal Building, 5000 Ellin Rd., Lanham, Maryland 20706.

FOR FURTHER INFORMATION CONTACT: Concerning the regulations,

Paul Handleman or Lauren Ross Taylor, (202) 622–3040; concerning submission of comments, the hearing, and/or to be placed on the building access list to attend the hearing, Kelly D. Banks, (202) 622–7180 (not toll-free numbers).

SUPPLEMENTARY INFORMATION:

Background

Temporary regulations in this issue of the Bulletin amend the Income Tax Regulations (26 CFR Part 1) relating to section 199. The temporary regulations provide guidance concerning the amendments made by the Tax Increase Prevention and Reconciliation Act of 2005 to section 199 of the Internal Revenue Code. 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 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 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 their impact on small business.

Comments and 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. Comments are requested on all aspects of the proposed regulations. In addition, the IRS and Treasury Department specifically request comments on the clarity of the proposed rules and how they can be made easier to under

stand. All comments will be available for public inspection and copying.

A public hearing has been scheduled for February 5, 2007 at 10:00 a.m., in the auditorium of the New Carrollton Federal Building, 5000 Ellin Rd., Lanham, Maryland 20706. Due to building security procedures, visitors must enter at the main entrance. In addition, all visitors must present photo identification to enter the building. Because of access restrictions, visitors will not be admitted beyond the immediate entrance area more than 30 minutes before the hearing starts. For information about having your name placed on the building access list to attend the hearing, see the “FOR FURTHER INFORMATION CONTACT” section of this preamble.

The rules of 26 CFR 601.601(a)(3) apply to the hearing. Persons who wish to present oral comments at the hearing must submit electronic or written comments and an outline of the topics to be discussed and the time to be devoted to each topic (a signed original and eight (8) copies) by January 16, 2007. A period of 10 minutes will be allotted to each person for making comments. An agenda showing the scheduling of the speakers will be prepared after the deadline for receiving outlines has passed. Copies of the agenda will be available free of charge at the hearing.

Drafting Information

The principal authors of these regulations are Paul Handleman and Lauren Ross Taylor, Office of Associate Chief Counsel (Passthroughs and Special Industries), IRS. 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 continues to read, in part, as follows:

Authority: 26 U.S.C. 7805 * * * Par. 2. Section 1.199–2 is amended to read as follows:

November 27, 2006 1013 2006–48 I.R.B.

Audio Recording Museum of Science,

Inc., South Hadley, MA Back Together Again, Inc.,

Greensboro, NC Barnes Retirement Living Center,

Barnes, WI Bay Side Oyster Nursery, Inc.,

Lockport, LA Bemodet International, Inc.,

Bowling Green, OH Bessie Lang Ministries, St. Louis, MO BGA Industries Community Development

Corporation, Jacksonville, FL Biomedical Research Institute,

Scarsdale, NY Bolinas Lagoon Watershed Team,

Bolinas, CA Bossier Housing Corporation, Inc.,

Shreveport, LA Brrothers Helping Others, Inc.,

Orange Park, FL Business Cares International,

Lawrenceville, GA Business in Development, Inc.,

Indianapolis, IN CA & J Economic Development, Inc.,

Montgomery, AL California Watershed Conservancy,

Sacramento, CA Carlson Family Foundation, Inc.,

Brunswick, OH Carsan Publishing Co., Inc., Atlanta, GA Caselli Ensemble, Corte Madera, CA Cassius Clay Foundation, Inc.,

Richmond, KY Center for International Theatre

Development, Inc., Baltimore, MD Center of Excellence in Geriatrics

Foundation, Inc., Charlotte, NC Cents–A–Page, Inc., Aurora, CO CFS Health Resource Alliance,

Minneapolis, MN Chadakoin Gateway Environmental

Development Group, Inc., Jamestown, NY Childrens Day Care, Riverdale, IL Choosing Hope Ministries, Inc.,

Falls Church, VA Christian Counseling International,

San Juan, PR Claremont Homes Tenant Council,

Baltimore, MD Clear Vision, Inc., Cordova, TN Club Recovery, Inc., West Palm Beach, FL Community & Business Resource

Development Corp., Homewood, IL Community Contributions for Kids,

McAllen, TX

§1.199–2 Wage limitation.

[The text of proposed §1.199–2 is the same as the text of §1.199–2T published elsewhere in this issue of the Bulletin.]

Par. 3. Section 1.199–3 is amended to read as follows:

§1.199–3 Domestic production gross receipts.

[The text of proposed §1.199–3 is the same as the text of §1.199–3T published elsewhere in this issue of the Bulletin.]

Par. 4. Section 1.199–5 is amended to read as follows:

§1.199–5 Application of section 199 to pass-thru entities for taxable years beginning after May 17, 2006, the enactment date of the Tax Increase Prevention and Reconciliation Act of 2005.

[The text of proposed §1.199–5 is the same as the text of §1.199–5T published elsewhere in this issue of the Bulletin.]

Par. 5. Section 1.199–7 is amended to read as follows:

§1.199–7 Expanded affiliated groups.

[The text of proposed §1.199–7 is the same as the text of §1.199–7T published elsewhere in this issue of the Bulletin.]

Par. 6. Section 1.199–8 is amended to read as follows:

§1.199–8 Other rules.

[The text of proposed §1.199–8 is the same as the text of §1.199–8T 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 October 18, 2006, 8:45 a.m., and published in the issue of the Federal Register for October 19, 2006, 71 F.R. 61692)

Foundations Status of Certain Organizations

Announcement 2006–92

The following organizations have failed to establish or have been unable to maintain their status as public charities or as operating foundations. Accordingly, grantors

and contributors may not, after this date, rely on previous rulings or designations in the Cumulative List of Organizations (Publication 78), or on the presumption arising from the filing of notices under section 508(b) of the Code. This listing does not indicate that the organizations have lost their status as organizations described in section 501(c)(3), eligible to receive deductible contributions.

Former Public Charities. The following organizations (which have been treated as organizations that are not private foundations described in section 509(a) of the Code) are now classified as private foundations:

ABA Diocesan Seminarians Support

Group, Inc., Rosedale, NY Advance Cellular Technology,

Scottsdale, AZ African Cultural Center, Incorporated,

Silver Spring, MD Agape Community Outreach, Inc.,

Flint, MI AGAPE Home Development Corporation,

Broken Arrow, OK Aids Vaccine Research Institute,

Glemont, NY Alice Hawthorne Education and

Development Fund, Inc., Sarasota, FL Alliance for Citizens Rights, Suitland, MD Alliance for Mental Health Consumers

Rights, San Antonio, TX Amateur International Sports Educational

Federation, Inc., Albuquerque, NM Ambassadors for Children’s Health, Inc.,

Johnson City, TN America Sevens Foundation, Inc.,

Miami Beach, FL American Institute of Regeneration,

Los Angeles, CA American Students Leadership Institute,

Inc., Rockville, MD Andiens, Inc., Houston, TX Antioch Community Development

Corporation, Memphis, TN Ark-Tex Housing Corporation,

Texarkana, TX Arks Foundation, Inc., Watchung, NJ Armanis House, Houston, TX Armenian International Sports

Foundation, Woodside, NY Association of Consumers and Tax Payers

Foundation, Washington, DC Association of Mexico – US Binational

Organizations, Ramsey, NJ

2006–48 I.R.B. 1014 November 27, 2006

Just Say Y.E.S. (Youth Empowerment

Supporters) Youth Services, Memphis, TN Kent Ministries, Inc., Forsyth, IL Kiddie Academy, Inc., Houston, TX Kids R’ Smart, Las Vegas, NV King of Glory Ministries Jesus is the

Answer, Bartow, FL Kiwanis Club of Sterling Foundation,

Sterling, IL Kiwanis Club of Third District

Foundation, Inc., New Orleans, LA La Alborada De Los Angeles, Inc.,

Yauco, PR Lancaster Community Housing, Inc.,

Lancaster, SC Le W. E. Learning Center, Chicago, IL Leading By Example, Inc., Sanford, FL Learning Excellence Achieving Purpose,

Inc., Detroit, MI Leon Educational Fund a Nonprofit

Corporation, New Orleans, LA Lifetime Solutions, Inc., Indianapolis, IN Light of Hope Evangelistic Ministries,

Kansas City, MO Lighthouse Sabbath Ministries, Inc.,

Doddridge, AR Lodi FFA Foundation, Lodi, CA Lottie House of House, Inc.,

Bridgeport, CT Manalapan Englishtown Education

Association Philanthropic Fund, Inc., Spotswood, NJ Maranatha World Ministries, Inc.,

Beaumont, TX Marin People Care, Petaluma, CA Mariner Foundation, Inc., Ketchikan, AK Massillon Area Charity and Scholarship

Fund, Massillon, OH Mc Mullen Ministries, Inc., Peoria, AZ Meade School District 46–1 Charitable

Trust, Sturgis, SD Means of Access, Inc., Bronx, NY Mercadien Foundation, Inc., Hamilton, NJ Miami Valley Golf Foundation,

Dayton, OH Miccio Foundation, Iowa City, IA Midway Heritage Foundation,

Midway, UT Military Heritage Foundation, Eureka, CA Moms Mission, Pontiac, MI Murad Foundation, Houston, TX Musicians, Iron Mountain, MI Na Hoaloha O Kaaina, Ltd., Lahaina, HI Napa Valley Express Softball Club,

Napa, CA National Community Relations

Foundation, Richton Park, IL

Community Health Access Project, Inc.,

Hawthorne, CA Coree Indian Tribe, Inc., Atlantic, NC Covenant Ministries Community

Development, Inc., Richmond, VA Creative Christian Solutions, Cary, NC Crescendo the International Center for

Program Innovation, Bellevue, WA Deliverance Temple Child Development

Center, Inc., Memphis, TN Destined for Greatness Foundation, Inc.,

St. Paul, MN Disabled Water Skiers Association, Inc.,

Melbourne, FL Disaster Relief Ministries,

Gladewater, TX Diverse Renaissance Project,

Los Angeles, CA Double Praise Ministries, Inc.,

Cheltenham, PA Dual Diagnosis Institute, Inc.,

La Crosse, WI Dubois-Garvey Foundation,

Merchantville, NJ E Makamae O Na Keiki O Hawaii,

Hilo, HI Earthrise International, Portland, OR East Gate Entrepreneurs, Inc.,

Medford, NY Education Partnerships, Inc., Fairfield, CT Elden Hotel Care Corporation,

San Juan, PR Employment Assistance Training

Services, Inc., Cherry Hill, NJ Energy Conservation Finance Institute,

San Francisco, CA Engine 27, Inc., New York, NY Ensemble Adriatico, Inc., Boston, MA Esparza Foundation, Inc., Inglewood, CA Eternal Light Community Center,

Maywood, IL Evangelist Community Organization

Center, Hot Springs, AR Family Life Global Resource Center,

South Holland, IL Father’s Heart Ministry, Denison, TX First Community Academy, Inc.,

Houston, TX For Him Outreach Ministries, Inc.,

Milwaukee, WI Foundation for Educational Renewal,

Inc., Charlotte, VT Foundation for International

Space Commerce and Law, Inc., New Smyrna Beach, FL Foundation for Research, Education,

and Excellance (FREE), Inc., Washington, DC

Foundation Service Center, Inc.,

Leominster, MA Foundation Up, Inc., Pennington, NJ Friends of the Universiteit Van

Amsterdam, Inc., New York, NY Fund for Late Vocations, St. Louis, MO GA Community Development, Inc.,

Miami, FL GAIA Foundation, Calabasas, CA Gary Wright Ministries, Saginaw, TX Georgia Learning Center, Riverdale, GA Get Outta Debt Now, Inc.,

Granada Hills, CA Gods Beloved Dove Ministries, Inc.,

West Los Angeles, CA God’s Economy, Baltimore, MD Goldfield Fairlord, Inc., Denver, CO Grady Scholars, Inc., Brooklyn, NY Green Strategies, Seattle, WA Haitian Pentecostal Community

Development Corp., South Orange, NJ Halt, Rockland, ME Hammarskjold Legacy, Inc.,

Fond du Lac, WI Harvest Time Evangelistic Assn.,

Batavia, IL Hawaii County Medical Society

Scholarship Fund, Honolulu, HI Hells on Fire Productions,

Los Angeles, CA Hillman Memorial Scholarship Fund,

Fremont, CA Home Network Center, Columbus, OH Hopelab Foundation, Inc., Palo Alto, CA Hosana Charities, Inc.,

New Brunswick, NJ Human Rights Protection Project,

Forestville, CA Huntington Beach Employment Council,

Huntington Beach, CA I Corinthians 13 Outreach Ministry, Inc.,

Atlanta, GA Institute for Family Development (FID),

Inc., Marblehead, MA Interfaith Missionary Movement,

Philadelphia, PA International Foundation for Applied

Research in the Natural Sciences, Newport Beach, CA Jade Kinder Care & Ministry,

Washington, DC Jeradnellys Corp., Carolina, PR Jersey City Firefighters Memorial, Inc.,

Jersey City, NJ Joe Hewitt Ministries, Rockwall, TX Juneteenth Productions, Inc., Chicago, IL Jungle Animal Wildlife Sanctuary,

Julian, CA

November 27, 2006 1015 2006–48 I.R.B.

Triangle Developmental Boxing

Association, Inc., Durham, NC TSS Cosmetology Tutorial Services,

St. Louis, MO United States Colored Troops Institute of

Suffolk County, Amityville, NY United We Stand, Inc., Morrow, GA Uplifting You, Inc., Los Angeles, CA Usher’s New Look, Inc., Larenceville, GA Utopia Community Home Care &

Transportation, Chicago, IL V & C Childrens Ranch, Houston, TX Verve Entertainment, Lake Elsinore, CA Vidalia Economic Housing Association,

Inc., Vidalia, GA Vietnamese Women Mutual Assistance

Association of San Francisco, San Francisco, CA Vision From Education to Success,

Detroit, MI Vision Health Institute, Alexandria, VA Vision Theatrical Foundation, Inc.,

Las Vegas, NV Walter R. Behrens Foundation,

Neotsu, OR We All Win, Inc., Springfield, OR Westchester Center, Inc., Thornwood, NY Whitehead Foundation, Inc., Silsbee, TX Wisconsin Motor Carriers Association

Foundation, Inc., Madison, WI WOCO, Inc., Wilmington, DE World Mystery Research Center, Niles, IL World to Come Foundation, Inc.,

Buford, GA Youth of America, Suffolk, VA

If an organization listed above submits information that warrants the renewal of its classification as a public charity or as a private operating foundation, the Internal Revenue Service will issue a ruling or determination letter with the revised classification as to foundation status. Grantors and contributors may thereafter rely upon such ruling or determination letter as provided in section 1.509(a)–7 of the Income Tax Regulations. It is not the practice of the Service to announce such revised classification of foundation status in the Internal Revenue Bulletin.

Native American Life Alternative, Inc.,

Copperas Cove, TX New Birth Community Services,

Ft. Lauderdale, FL New Braintree Historical Society,

New Braintree, MA New Life X S A Group, Inc., Newark, NJ New Pathway Institute, Inc.,

Boca Raton, FL Next Step Foundation, Belleville, MI Nichiren Shoshu Buddhist Learning

Center, Russellville, AR Non Profit Auto Tech, Inc., Houston, TX North American Foundation, Littleton, CO North East Regional American Indian

Movement, Inc., Shirley, NY Oak Creek Crime Stoppers,

Oak Creek, WI Old Farm Museum, Inc., Manti, UT Oliver Van Foundation for the Needy,

Chicago, IL Open Planning Project, Inc.,

New York, NY Opera House, Pittsburgh, PA Our Fathers House, Redford, MI Panoramic Viewpoints, Oxnard, CA Parents United for Child Care, Inc.,

Augusta, GA Peak Foundation, Inverness, IL Pineywoods Youth Football Association,

Nacogdoches, TX PlusTime USA, Chichester, NH Police Athletic League of North

Huntingdon Umpire School, Inc., North Huntingdon, PA Potters House of Victory, Lilburn, GA Power of One - International Aids

Relief, Phoenix, AZ Prayer Praise & Peace International

Incorporation, Rockford, IL Prayer Time Ministries, Atlanta, GA Princess Lee Foundation for Child Abuse

and Neglect, Las Vegas, NV Project Wave, Inc., Houston, TX Project Youth Care, Inc., Gainesville, FL R M N R, Inc., Ontario, CA Raoul Wallenberg Humanitarian Institute,

Chicago, IL Resource Roundup Research Fund,

Hulett, WY Richland Social Services Center, Inc.,

Mansfield, OH Rising Farmworker Dream Fund,

Live Oak, CA Robert Duncan Ministries,

Wilkesboro, NC

Rocking R Ranch, Trona, CA Russian American Rule of Law

Consortium, Inc., Burlington, VT Safe Kids International, Inc.,

Richmond, VA Sahmas Hope, Inc., Atlanta, GA Sail Sport Med, Inc., Wilmington, NC San Francisco Filipino Cultural Center,

San Francisco, CA Sawyer Economic Development Fund,

Inc., Memphis, TN SCF Charitable Giving Fund, Canton, OH Second Chance Int’l Housing,

Incorporated, Gary, IN Seeds of Hope Foundation, Inc.,

East Bridgewater, MA SHA-LA-DAI Economic Development

Corporation, Los Angeles, CA Share Our Vision Ministries,

Chattanooga, TN Sharing Caring Mission of Love, Inc.,

Los Angeles, CA Silverlake Dog Park Association,

Los Angeles, CA Sisters Keeper Resource Center, Inc.,

Temple Hills, MD Small Wonders Daycare and Learning

Centers, Inc., Detroit, MI Society of Young-Porterfield Descendants,

Columbia, SC Soho Arts Council, Inc., New York, NY South Davidson Community Chest,

Denton, NC Space Age Evangelism International, Inc.,

Hesperia, CA Stillwell’s Community, Inc., Lithonia, GA Stinger Foundation, Murfreesboro, TN Synergistic Healing, Inc., Sheboygan, WI Synergistic Youth Enterprises, Inc.,

Fairburn, GA Tarheel Regional Community

Development Corporation, Henderson, NC This Time Around, Inc., Dallas, TX Tidd Home, Woburn, MA To Know Jesus Ministries, Inc.,

Cloves, NM Total Woman, Inc., Montalba, TX Touch Support Services, Inc.,

Winston-Salem, NC Training Office & Professional Services,

Dayton, OH Transition House an Arkansas/Non Profit,

Little Rock, AR Tri-State Liver Transplant Support Group,

Cincinnati, OH

2006–48 I.R.B. 1016 November 27, 2006

Procedures for 501(c)(3) Tax-Exempt Organizations to Change Public Charity Classification

Announcement 2006–93

The Pension Protection Act of 2006 permits specified individuals to make contributions from their Individual Retirement Accounts (“IRA”) to certain public charities without including the amounts in the contributor’s income. In addition, the Act restricts private foundations from making distributions to certain public charities. In both cases, the new provisions relate to the recipient organization’s classification as a public charity under section 509(a).

Public charities include churches, schools, hospitals, and charities that receive public support as described in section 509(a)(1) and (2), as well as organizations that are described in section 509(a)(3) that support one or more specified organizations described in sections 509(a)(1) or (2). Organizations described in section 509(a)(3) also are known as supporting organizations.

Under the Pension Protection Act of 2006, distributions from IRAs to supporting organizations, as described in section 509(a)(3), are not excludable from the IRA holder’s income. In addition, distributions from private foundations to certain supporting organizations described in section 509(a)(3) are not qualifying distributions

and may be taxable expenditures for the private foundation. For this reason, organizations currently classified as supporting organizations, as described in section 509(a)(3), may wish to seek reclassification under section 509(a)(1) or (2).

Process to Request Change in Public Charity Classification Related to Pension Protection Act

A section 501(c)(3) tax-exempt organization seeking to change its public charity classification for reasons related to changes made by the Pension Protection Act has to submit a written request for reclassification from section 509(a)(3) to the Internal Revenue Service pursuant to Revenue Procedure 2006–4, 2006–1 I.R.B. 132 (available at www.irs.gov/pub/irs-tege/rp2006–4.pdf ). This request has to include the following:

A statement requesting reclassification from section 509(a)(3) to another public charity status under 509(a)(1) or (2); and,
Either,

a. Page one and the signature page of most recently filed Form 990 or Form 990–EZ, and pages 2 and 3 (Parts IV and IV–A) of Schedule A related to the organization’s most recently filed Form 990 or 990–EZ; or

b. Form 8734, Support Schedule for Advance Ruling Period The organization has to write at the top of the request, “509(a)(3) Pension Protection Act”, and mail or fax the complete request for reclassification to:

Mail: IRS-TEGE Attn: Adjustments Unit, Room 4024 P.O. Box 2508 Cincinnati, OH 45201

Fax: IRS-TEGE Attn: Adjustments Unit, Room 4024 Fax number: (513) 263–3522

If an organization previously submitted a regular request for reclassification related to changes made by the Pension Protection Act, the organization should mail or fax a statement notifying us that a request for reclassification was submitted.

Organizations will receive a determination letter indicating whether the change in public charity classification has been made. There is no user fee for this determination letter.

For Further Information

Contact Customer Account Services, 1–877–829–5500.