Part IV. Items — Internal Revenue Bulletin 2007-5

Notice of Proposed Rulemaking by Cross-Reference to Temporary Regulations

Corporate Reorganizations; Distributions Under Sections 368(a)(1)(D) and 354(b)(1)(B)

REG–125632–06

AGENCY: Internal Revenue Service (IRS), Treasury.

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

SUMMARY: In this issue of the Bulletin, the IRS is issuing temporary regulations (T.D. 9303) that provide guidance regarding the qualification of certain transactions as reorganizations described in section 368(a)(1)(D) where no stock and/or securities of the acquiring corporation is issued and distributed in the transaction. These regulations affect corporations engaging in such transactions and their shareholders. The text of those regulations also serves as the text of these proposed regulations.

DATES: Written or electronic comments and requests for a public hearing must be received by March 19, 2007.

ADDRESSES: Send submissions to: CC:PA:LPD:PR (REG–125632–06), Internal Revenue Service, PO Box 7604, Ben Franklin Station, Washington, DC 20044. Submissions may be hand delivered to CC:PA:LPD:PR (REG–147144–06), Courier Desk, Internal Revenue Service, Crystal Mall 4, 1901 South Bell Street, Arlington, Virginia, 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–125632–06).

FOR FURTHER INFORMATION CONTACT: Concerning the proposed regulations, Bruce A. Decker, (202) 622–7550; concerning submission of comments, requests for a public hearing, and/or a publication and regulations specialist, Treena Garrett, (202) 622–7180.

SUPPLEMENTARY INFORMATION:

Background

Temporary regulations in this issue of the Bulletin amend 26 CFR part 1. The temporary regulations provide guidance on circumstances where the distribution of stock and/or securities under section 354(b)(1)(B) will be deemed satisfied in the absence of an actual issuance of stock and/or securities pursuant to a reorganization described in section 368(a)(1)(D). The text of those regulations also serves as the text of these proposed regulations. The preamble to the temporary regulations explains the amendments.

Explanation of Provisions

These temporary regulations provide guidance regarding the circumstances in which the distribution requirement under sections 368(a)(1)(D) and 354(b)(1)(B) is deemed satisfied despite the fact that no stock and/or securities are actually issued in a transaction otherwise described in section 368(a)(1)(D). These regulations will affect certain cash sales of assets between two corporations that have the same direct or indirect shareholders or a de min- imis variation in shareholder identity and proportionality.

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 regulation does 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 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. The IRS and Treasury Department request comments on several issues relating to acquisitive reorganizations described in section 368(a)(1)(D). Specifically, the IRS and Treasury Department request comments on whether the meaningless gesture doctrine is inconsistent with the distribution requirement in sections 368(a)(1)(D) and 354(b)(1)(B), especially in situations in which the cash consideration received equals the full fair market value of the property transferred such that there is no missing consideration for which the nominal share of stock deemed received and distributed could substitute. The IRS and Treasury Department also request comments on the extent, if any, to which the continuity of interest requirement should apply to a reorganization described in section 368(a)(1)(D). The IRS and Treasury Department request comments on whether these temporary regulations should apply when the parties to the reorganization are members of a consolidated group. Finally, the IRS and Treasury Department request comments on the continued vitality of various liquidation-reincorporation authorities after the enactment of the Tax Reform Act of 1986, Public Law 99–514 (100 Stat. 2085 (1986)). All comments will be available for public inspection and copying. A public hearing will be scheduled if requested in writing by any person that timely submits written comments. If a public hearing is scheduled, notice of the date, time, and place for the public hearing will be published in the Federal Register .

Drafting Information

The principal author of these regulations is Bruce A. Decker, Office of Associate Chief Counsel (Corporate).

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January 29, 2007 415 2007–5 I.R.B.

deflator formula. 49” is corrected to read “Price Index)). See 49 CFR part 1201, subpart A, §1–1(a). In general, Class III railroads have annual carrier operating revenues of $20 million or less after applying the railroad revenue deflator formula. See 49”. 6. On page 53010, column 3, in the preamble, under the paragraph heading “ Eligible Taxpayer ”, second paragraph of the column, tenth to seventeenth lines, the language “services are the transport of freight by rail, the loading and unloading of freight transported by rail, locomotive leasing or rental, and maintenance of a railroad’s right-of-way (including vegetation control). Examples of services that are not railroad-related services are general business services,” is corrected to read “services include the transport of freight by rail, the loading and unloading of freight transported by rail, locomotive leasing or rental, and maintenance of a railroad’s right-of-way (including vegetation control). Examples of services that are not railroad-related services include general business services,”.

On page 53011, column 1, in the preamble, under the paragraph heading “ De- termination of QRTME Paid or Incurred ”, second paragraph, third and fourth lines, the language “to a taxpayer using an accrual method of accounting. In this case, paid or” is corrected to read “to taxpayers using an accrual method of accounting. For such taxpayers, paid or”.
On page 53011, column 1, in the preamble, under the paragraph heading “ Determination of QRTME Paid or In- curred ”, second paragraph, fifteenth to twentieth lines, the language “any such expenditures. The temporary regulations provide that reimbursements may consist of amounts paid either directly or indirectly to the taxpayer. Examples of indirect reimbursements are discounted freight shipping rates,” is corrected to read “any expenditures that would otherwise qualify as QRTME. The temporary regulations provide that reimbursements may consist of amounts paid either directly or indirectly to the taxpayer. Examples of indirect reimbursements include discounted freight shipping rates,”.
On page 53011, column 1, in the preamble, under the paragraph heading “ De- termination of QRTME Paid or Incurred ”, third paragraph, first line, the language

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 as follows:

Authority: 26 U.S.C. 7805 * * * Par. 2. Section 1.368–2 is amended by revising paragraph (l) to read as follows:

§1.368–2 Definition of terms.

- - - (l) [The text of this proposed amendment to §1.368–2(l) is the same as the text of §1.368–2T(l)(1) through (l)(4)(i) 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 December 18, 2006, 8:45 a.m., and published in the issue of the Federal Register for December 18, 2006, 71 F.R. 75898)

Railroad Track Maintenance Credit; Correction

Announcement 2007–8

AGENCY: Internal Revenue Service (IRS), Treasury.

ACTION: Correction to temporary regulations.

SUMMARY: This document contains corrections to temporary regulations (T.D. 9286, 2006–43 I.R.B. 750) that were published in the Federal Register on Friday, September 8, 2006 (71 FR 53009) providing rules for claiming the railroad track maintenance credit under section 45G of the Internal Revenue Code for qualified railroad track maintenance expenditures paid or incurred by a Class II railroad or Class III railroad and other eligible taxpayers during the taxable year.

DATES: This correction is effective September 8, 2006.

FOR FURTHER INFORMATION CONTACT: Winston H. Douglas, (202) 622–3110 (not a toll-free number).

SUPPLEMENTARY INFORMATION:

Background

The correction notice that is the subject of this document is under section 45G of the Internal Revenue Code.

Need for Correction

As published, temporary regulations (T.D. 9286) contain errors that may prove to be misleading and are in need of clarification.

Correction of Publication

Accordingly, the publication of the temporary regulations (T.D. 9286), which was the subject of FR Doc. E6–14858, is corrected as follows:

On page 53010, column 1, in the preamble, under the paragraph heading “ Gen- eral Overview ”, first and second lines from the bottom of the second paragraph, the language “assigned to such person by such a railroad.” is corrected to read “assigned to such person by a Class II railroad or a Class III railroad.”.
On page 53010, column 2, in the preamble, under the paragraph heading “ Scope ”, first paragraph of the column, last line of the paragraph, the language “of controlled groups under section 45G.” is corrected to read “of controlled groups under section 45G with respect to the RTMC.”.
On page 53010, column 2, in the preamble, under the paragraph heading “ El- igible Taxpayer ”, fourth line of the first paragraph, the language “defined in the temporary regulations as:” is corrected to read “defined as:”.
On page 53010, column 2, in the preamble, under the paragraph heading “ Eli- gible Taxpayer ”, third line from the bottom of the first paragraph, the language “railroad track assigned to the person for” is corrected to read “railroad track assigned to the taxpayer for”.
On page 53010, column 2, in the preamble, under the paragraph heading “ Eli- gible Taxpayer ”, second through the sixth line from the bottom of the second paragraph, the language “Price Index)). 49 CFR part 1201, subpart A, §1–1(a). In general, Class III railroads have annual carrier operating revenues of $20 million or less after applying the railroad revenue

2007–5 I.R.B. 416 January 29, 2007

improvements to such assets with respect to which QRTME is paid or incurred by another person that does not have a depreciable interest in such assets.”

LaNita Van Dyke, Chief, Publications and

Regulations Branch, Legal Processing Division,

Associate Chief Counsel (Procedure and Administration).

(Filed by the Office of the Federal Register on December 7, 2006, 8:45 a.m., and published in the issue of the Federal Register for December 8, 2006, 71 F.R. 71045)

Treatment of Services Under Section 482; Allocation of Income and Deductions From Intangibles; Stewardship Expense; Correction

Announcement 2007–9

AGENCY: Internal Revenue Service (IRS), Treasury.

ACTION: Correcting amendments.

SUMMARY: This document contains corrections to final and temporary regulations (T.D. 9278, 2006–34 I.R.B. 256) that was published in the Federal Register on Friday, August 4, 2006 (71 FR 44466) regarding the treatment of controlled services transactions under section 482 and the allocation of income from intangibles, in particular with respect to contributions by a controlled party to the value of an intangible owned by another controlled party. This document also contains corrections to final and temporary regulations that modify the regulations under section 861 concerning stewardship expenses to be consistent with the changes made to the regulations under section 482.

EFFECTIVE DATE: The amendments are effective on January 1, 2007.

FOR FURTHER INFORMATION CONTACT: Thomas A. Vidano, (202) 435–5265, or Carol B. Tan (202) 435–5159, for matters relating to section 482, and David F. Bergkuist, (202) 622–3850, for matters relating to stewardship expenses (not toll-free numbers).

“If an eligible taxpayer (assignee) pays” is corrected to read “The IRS and Treasury believe that the statute is intended to allow suppliers and shippers to claim the credit for providing the funding for the QRTME performed on railroad track owned by, or leased to, a Class II railroad or Class III railroad. However, the suppliers and shippers may not have the necessary expertise to perform the repairs and improvements. The IRS and Treasury believe that these eligible taxpayers should be able to claim the credit for providing the funding to the extent that the Class II railroads and Class III railroads use such funding to perform the repairs and improvements to the track. Therefore, if an eligible taxpayer (assignee) pays”.

On page 53011, column 1, in the preamble, under the paragraph heading “ Determination of QRTME Paid or In- curred ”, third paragraph, fifth line from the bottom of the column, the language “paragraph, this QRTME would be” is corrected to read “paragraph, QRTME would be”.
On page 53011, column 2, in the preamble, under the paragraph heading “ Assignment of Railroad Track Miles ”, first paragraph, first through fifth lines, the language “For purposes of section 45G, the temporary regulations provide that an assignment of a mile of railroad track is not a legal transfer of title, but merely a designation. This designation must be” is corrected to read “The temporary regulations provide that an assignment of a mile of railroad track is not a legal transfer of title, but merely a designation made solely for purposes of section 45G. This designation must be”.
On page 53011, column 2, in the preamble, under the paragraph heading “ Assignment of Railroad Track Miles ”, second paragraph, fifth line, the language “track. Thus, if a Class II railroad or Class” is corrected to read “track. If a Class II railroad or Class”.
On page 53011, column 2, in the preamble, under the paragraph heading “ Assignment of Railroad Track Miles ”, fourth paragraph, second line, the language “that a taxpayer must file Form 8900,” is corrected to read “that a taxpayer file Form 8900,”.
On page 53011, column 3, in the preamble, last paragraph of the column,

first line, the language “The temporary regulations also” is corrected to read “The temporary regulations”.

On page 53012, column 1, in the preamble, first paragraph of the column, first line, the language “assignment is properly reported.” is corrected to read “assignment is reported.”.
On page 53012, column 1, in the preamble, under the paragraph heading “ Special Rules ”, first paragraph, second through fourth lines from the bottom of the paragraph, the language “structure (railroad track, roadbed, bridges, and related track structures) and intangible assets to which the” is corrected to read “structure and intangible assets to which the”.
On page 53012, column 1, in the preamble, under the paragraph heading “ Special Rules ”, second paragraph, sixth line, the language “of the RTMC allowable. This reduction” is corrected to read “of the RTMC allowable. The basis reduction”.
On page 53012, column 1, in the preamble, under the paragraph heading “ Special Rules ”, third paragraph, first line, the language “The temporary regulations also” is corrected to read “The temporary regulations do not”.
On page 53012, column 2, in the preamble, under the paragraph heading “ Special Rules ”, first paragraph of the column, fourth line to the last of the paragraph, the language “legislative history does not refer to, any exception to this rule. Accordingly, pursuant to section 61 and the regulations under section 61, the owner of the tangible assets (for example, railroad track and roadbed) with respect to which the QRTME is paid or incurred by another person that does not have a depreciable interest in those assets has gross income in the amount of that QRTME. However, the application of section 61 to QRTME paid or incurred with respect to eligible railroad track that is leased by a Class II railroad or Class III railroad raises a question as to under what circumstances the owner or lessee should recognize gross income with respect to QRTME. The IRS and Treasury Department request comments on this issue.” is replaced to read “legislative history does not refer to, any exception to this rule for an owner of tangible assets (for example, railroad track and roadbed) for the value of the repairs or

January 29, 2007 417 2007–5 I.R.B.

SUPPLEMENTARY INFORMATION:

Background

The final and temporary regulations that are the subject of these corrections are under sections 482 and 861 of the Internal Revenue Code.

Need for Correction

As published, the final and temporary regulations (T.D. 9278) contains errors that may prove to be misleading and are in need of clarification.

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Correction of Publication

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

PART 1—INCOME TAXES

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

Authority: 26 U.S.C. 7805 * * * Par. 2. Section 1.482–0T is amended by removing the entries for paragraphs (i)(1) through (i)(10), (j)(1), (j)(2) and (j)(3) from §1.482–1T.

Par. 3. Section 1.482–1 is amended by revising paragraph (i) introductory text to read as follows:

§1.482–1 Allocation of income and deductions among taxpayers.

- - - (i) [Reserved]. For further guidance, see §1.482–1T(i) introductory text.
- - - Par. 4. Section 1.482–1T is amended as follows:

Paragraphs (i)(1) through (i)(10) are added and reserved.
Paragraphs (j)(1) through (j)(5) are amended by adding “§” before the language “1.482–1(j)(1)”.

The addition reads as follows:

§1.482–1T Allocation of income and deductions among taxpayers (temporary).

- - - (i)(1) through (i)(10) [Reserved]. For further guidance, see §1.482–1(i)(1) through (i)(10).
- - - Par. 5. Section 1.482–8T is amended by revising paragraph (b) Example 12. (iv), second sentence to read as follows:

§1.482–8T Example of the best method rule (temporary).

- - - (b) - - Example 12. (i) * * * (iv) * * * USP contributed the long-term endorsement contracts with professional athletes. - * *
- - - Par. 6. Section 1.482–9T is amended as follows:

Paragraph (b)(6), Example 22 . (vi), introductory text is revised.
Paragraph (g)(2), Example 2. (iv), fifth sentence is revised.
Paragraph (i)(2) is revised.
Paragraph (i)(5), Example 1. (iii), first sentence is revised.
Paragraph (i)(5), Example 3. (ii), first sentence is revised.
Paragraph (l)(5), Example 20. (i), second sentence is revised.
Paragraph (m)(5), Example 1. (ii), fourth sentence is revised.

The revisions read as follows:

§1.482–9T Methods to determine taxable income in connection with a controlled services transaction (temporary).

- - - (b) - * (6) - * Example 22. (i) * * * (vi) In contrast, if aggregated services AB were allocated by reference to the total U.S. dollar value of sales to uncontrolled parties (trade sales) by each company, the following results would obtain:
- - - (g) - * (2) - * Example 2. - * * (iv) * * * In the bid on the Country 2 contract for Level 1 waste remediation, Company B proposes to use a multidisciplinary team of specialists from Company A and Company B. * * *
- - - (i) - - (2) - - - For purposes of this paragraph (i), an arrangement will be treated as a contingent-payment arrangement if it meets all of the requirements in paragraph (i)(2)(i) of this section and is consistent

with the economic substance and conduct requirement in paragraph (i)(2)(ii) of this section.

- - - (5) - * Example 1. (i) * * * (iii) The years under examination are years 6 through 9. ***
- - - Example 3. (i) * * * (ii) The years under examination are years 6 through 9. - -
- - - (l) - - (5) - * Example 20. (i) * * * Y, a Country B corporation, is a distribution and marketing company that also performs clinical trials for X in Country B. * * *
- - - (m) - - (5) - * Example 1. (i) * * * (ii) * * * The comparable profits method may provide the most reliable measure of an arm’s length result if uncontrolled parties are identified that perform similar, combined functions of maintaining and providing spare parts for similar equipment. - * *
- - - Par. 7. Section 1.861–8T is amended as follows:

Paragraph (b)(3) is revised.
Paragraph (g), paragraph (i) following Example 30 . (i)(C) is redesignated as paragraph (ii) and the paragraph designation for Example 30 . (i)(C) is removed.
Paragraph (h)(1), first three sentences are revised.
Paragraph (h)(3) is revised. The revisions read as follows:

§1.861–8T Computation of taxable income from sources within the United States and from other sources and activities (temporary).

- - - (b) - * (3) Supportive functions . Deductions which are supportive in nature (such as overhead, general and administrative, and supervisory expenses) may relate to other deductions which can more readily be allocated to gross income. In such instance, such supportive deductions may be allocated and apportioned along with the deductions to which they relate. On the other hand, it would be equally acceptable to attribute supportive deductions on

2007–5 I.R.B. 418 January 29, 2007

section 482 transfer price adjustments (temporary).

- - - (d)(2)(ii)(B) A taxpayer’s selection of the services cost method for certain services, described in §1.482–9T(b), and its application of that method to a controlled services transaction will be considered reasonable for purposes of the specified method requirement only if the taxpayer reasonably allocated and apportioned costs in accordance with §1.482–9T(k), reasonably concluded that the controlled services transaction meets the conditions of §1.482–9T(b)(3), and reasonably concluded that the controlled services transaction is not described in §1.482–9T(b)(2).

Cynthia Grigsby, Senior Federal Register Liaison Officer,

Legal Processing Division,

Associate Chief Counsel (Procedure and Administration).

(Filed by the Office of the Federal Register on December 21, 2006, 8:45 a.m., and published in the issue of the Federal Register for December 22, 2006, 71 F.R. 76902)

some reasonable basis directly to activities or property which generate, have generated or could reasonably be expected to generate gross income. This would ordinarily be accomplished by allocating the supportive expenses to all gross income or to another broad class of gross income and apportioning the expenses in accordance with paragraph (c)(1) of this section. For this purpose, reasonable departmental overhead rates may be utilized. For examples of the application of the principles of this paragraph (b)(3) to expenses other than expenses attributable to stewardship activities, see Examples 19 through 21 of paragraph (g) of this section. See paragraph (e)(4)(ii) of this section for the allocation and apportionment of deductions attributable to stewardship expenses. However, supportive deductions that are described in §1.861–14T(e)(3) shall be allocated and apportioned in accordance with the rules of §1.861–14T and shall not be allocated and apportioned by reference only to the gross income of a single member of an affiliated group of corporations as defined in §1.861–14T(d).

(h) - - - (1) - - - In general, the rules of this section, as well as the rules of §§1.861–9T, 1.861–10T, 1.861–11T, 1.861–12T, and 1.861–14T apply for taxable years beginning after December 31, 1986, except for paragraphs (a)(5)(ii), (b)(3), (e)(4), (f)(4)(i), and paragraph (g) Example 17, Example 18, and Example 30 of this section, which are generally applicable for taxable years beginning after December 31, 2006. Also, see §§1.861–8(e)(12)(iv) and 1.861–14(e)(6) for rules concerning the allocation and apportionment of deductions for charitable contributions. In the case of corporate taxpayers, transition rules set forth in §1.861–13T provide for the gradual phase-in of certain provisions of this and the foregoing sections. - * *

(3) Expiration date . The applicability of the paragraphs (a)(5)(ii), (b)(3), (e)(4), (f)(4)(i), and paragraph (g) Example 17, Example 18, and Example 30 of this section, expires on or before July 31, 2009.

Par. 8. Section 1.6662–6T is amended by revising paragraph (d)(2)(ii)(B), first sentence to read as follows:

§1.6662–6T Transactions between parties described in section 482 and net

January 29, 2007 419 2007–5 I.R.B.