SECTION 2. APPLICABILITY OF

§ 1.355–3(b)(4)(iii)

Section 1.355–3(b)(4)(iii) provides an exception to the general no gain or loss rule in § 355(b)(2)(C) and (D), stating that “[a] direct or indirect acquisition of a trade or business by one member of an affiliated

group from another member of the group is not the type of transaction to which section 355(b)(2)(C) and (D) is intended to apply. Therefore, in applying section 355(b)(2)(C) or (D), such an acquisition, even though taxable, shall be disregarded.” While § 1.355–3(b)(4) is generally applicable to distributions on or before December 15, 1987, the IRS has applied it administratively to distributions occurring after that date, consistent with the amendments to § 355(b)(2)(D) in 1987 and 1988. See Public Law 100–203 (101 Stat. 1330, 1330–411 (1987)) and Public Law 100–647 (102 Stat. 3342, 3605 (1988)). Section 355(b) was amended again on May 17, 2006. See Section 202 of the Tax Increase Prevention and Reconciliation Act of 2005, Public Law 109–222 (120 Stat. 345, 348) and Section 410 of division A of the Tax Relief and Health Care Act of 2006, Public Law 109–432 (120 Stat. 2922, 2963). This amendment added § 355(b)(3), which provides that a corporation shall be treated as meeting the requirement of § 355(b)(2)(A) if and only if such corporation is engaged in the active conduct of a trade or business. Section 355(b)(3)(B) provides that for purposes of § 355(b)(3)(A) (and, consequently, § 355(b)(2)(A)), all members of such corporation’s separate affiliated group (SAG) shall be treated as one corporation.

The IRS and Treasury Department have interpreted § 355(b)(3) as calling into question whether the regulation quoted above appropriately reflects the statute as amended in 2006. See Notice of Proposed Rulemaking, Guidance Regarding the Active Trade or Business Requirement Under Section 355(b), 72 Fed. Reg. 26012 (No. 88) (May 8, 2007) (proposing to modify § 1.355–3) (NPRM). However, consistent with past administrative practice, the IRS will not challenge the applicability of the rule stated in § 1.355–3(b)(4)(iii) to distributions effected on or before the date of publication in the Federal Register of temporary or final regulations modifying the rule stated in § 1.355–3(b)(4)(iii).