SECTION 3. CERTAIN ACQUISITIONS

OF ADDITIONAL STOCK OF THE CONTROLLED CORPORATION

Section 355(b)(2)(C) by its terms applies to asset acquisitions while § 355(b)(2)(D) applies to stock acquisitions. The IRS and Treasury Department have interpreted § 355(b)(3) as modifying the applicability of § 355(b)(2)(C) and (D). Section 355(b)(3) essentially treats a stock acquisition that results in the acquired corporation becoming a subsidiary member of the acquiring corporation’s SAG as an asset acquisition for purposes of § 355(b). See NPRM. Accordingly, the IRS and Treasury Department have concluded that such a stock acquisition is subject to § 355(b)(2)(C) regardless of whether it results in an acquisition of control that would otherwise be subject to § 355(b)(2)(D). See NPRM.

Acquisitions of stock of the controlled corporation that result in the controlled corporation becoming a member of the distributing corporation’s SAG are treated as asset acquisitions that are subject to § 355(b)(2)(C) regardless of whether the distributing corporation already controlled the controlled corporation. Specifically, such an acquisition could violate § 355(b)(2)(C) notwithstanding the fact that it would not violate § 355(b)(2)(D) because there was no acquisition of control.

For example, assume that for more than five years, corporations D and C have each engaged in the active conduct of a trade or business. The trades or businesses are not in the same line of business. Throughout this period, D has owned stock of C constituting control (as defined in § 368(c)) but not meeting the requirements of § 1504(a)(2). In year 6, D purchases for cash the remainder of the C stock from an unrelated party. The purchase of the additional C stock does not violate § 355(b)(2)(D) because D already owned stock of C constituting control. However, because after the purchase D owns stock of C meeting the requirements of § 1504(a)(2), C becomes a member of D’s SAG, and D and C are treated as one corporation for purposes of the active trade or business requirement. Accordingly, for § 355(b) purposes, D has

August 27, 2007 466 2007–35 I.R.B.

that, if taken by September 30, 2007, permit separate plans to be established for commercial ITG employees and for other ITG employees who perform essential governmental functions (governmental ITG employees) under the reasonable and good faith compliance standard. Section III.E. indicated that the relief provided in Section III applied pending the issuance of further guidance relating to § 414(d), including the amendment made by section 906(a)(1) of PPA ’06. The notice also invited comments from the public on whether additional transition issues need to be addressed.

III. Extension of Transition Relief under Notice 2006–89

Since the issuance of Notice 2006–89, the Service and Treasury have continued to consult with Indian tribal government representatives. Based on those consultations and the comments received in response to Notice 2006–89, and until future guidance is issued, the transition relief provided under Notice 2006–89 is hereby revised so that the date “September 30, 2007” in Section III.B. of Notice 2006–89 is replaced with “the date that is six months after guidance is issued under § 414(d) of the Code, as amended by section 906 of the Pension Protection Act of 2006, on the determination of whether a retirement plan maintained by an ITG is a governmental plan with the meaning of § 414(d).”

This extension is conditioned on the plans involved not being amended, for periods before the extended date, to reduce benefits unless the reduction: (i) does not vary based upon whether the participant is a governmental ITG employee or a commercial ITG employee, or (ii) is made to the plan for commercial ITG employees and is the minimum reduction necessary to satisfy the requirements of the Code. If a reduction occurs that does not meet either of these conditions, the extension provided under this notice ends on the date the reduction goes into effect.

IV. Effect on Other Documents

Notice 2006–89 is modified.

Drafting Information

The principal author of this notice is Diane S. Bloom of the Employee Plans,

acquired the assets of C in a transaction in which gain or loss was recognized in violation of § 355(b)(2)(C).

Taxpayers may not have anticipated that such acquisitions of additional stock of the controlled corporation would adversely impact the controlled corporation’s ability to satisfy the active trade or business requirement. Accordingly, the IRS will not challenge the distributing corporation’s (or its SAG’s) acquisition of additional stock of the controlled corporation as a violation of § 355(b)(2)(C) with respect to the controlled corporation in the case of distributions effected on or before the date the proposed regulations in the NPRM are published as temporary or final regulations in the Federal Register, provided that the transaction satisfies the requirements of § 355(b)(2)(D) as in effect before the enactment of § 355(b)(3).