SECTION 4. REGULATIONS TO BE

ISSUED

To address certain transactions, including those described in Section 3 of this notice, the IRS and Treasury intend to issue regulations identifying stock of the foreign corporation that is not taken into account for purposes of the Ownership Condition. The regulations will identify stock of the foreign corporation that shall not be taken into account for purposes of the Ownership Condition, even if such stock may not otherwise be described in section 7874(c)(2)(B). The regulations will also clarify that certain stock, which may be described in section 7874(c)(2)(B), shall nonetheless be taken into account for purposes of the Ownership Condition.

The regulations issued pursuant to this notice shall provide that stock of the foreign corporation issued in exchange for “nonqualified property” in a transaction related to the acquisition described in section 7874(a)(2)(B)(i) is not taken into account for purposes of the Ownership Condition, without regard to whether such stock is publicly traded on the date of issuance or otherwise. Subject to certain exceptions, the term “nonqualified property” shall generally mean: (1) cash or cash equivalents; (2) marketable securities as defined in section 453(f)(2); and (3) any other property acquired in a transaction

with a principal purpose of avoiding the purposes of section 7874.

For this purpose, however, marketable securities generally shall not include stock (or a partnership interest) issued by a member of the expanded affiliated group (as defined in section 7874(c)(1)) that after the acquisition includes the foreign corporation, unless a principal purpose of the issuance of the stock of the foreign corporation in exchange for such property was the avoidance of the purposes of section 7874. For this purpose, a partnership shall be treated as a member of an expanded affiliated group if the partnership would be a member of the expanded affiliated group if it were a corporation.

The regulations shall provide similar rules to address acquisitions of property by one or more members of the expanded affiliated group (that includes the foreign corporation after the acquisition) in exchange for stock of the foreign corporation, including, for example, pursuant to a triangular reorganization. For this purpose, a partnership shall be treated as a member of an expanded affiliated group if the partnership would be a member of the expanded affiliated group if it were a corporation.

The rules described in this notice are not intended to affect the application of section 7874(c)(2)(A), §1.7874–1, or section 7874(c)(4). The following examples illustrate the rules concerning the Ownership Condition that are intended to be included in the regulations described in this notice. For purposes of the examples, unless otherwise indicated, FA, FMS and FT are foreign corporations, DMS and DT are domestic corporations, PRS is a partnership, all entities are unrelated, and section 7874(c)(4) may apply to disregard certain transfers.

Example 1 . Stock issued in exchange for mar- ketable securities . (i) Facts . Individual A wholly owns DT. FA, a newly formed corporation, acquires all the DT stock from individual A in exchange solely for FA stock. In a transaction related to FA’s acquisition of the DT stock, PRS transfers marketable securities (within the meaning of section 453(f)(2)) to FA solely in exchange for FA stock.

(ii) Analysis . The FA stock issued to PRS in exchange for the marketable securities is not taken into account for purposes of the Ownership Condition.

Example 2 . Stock issued with a principal purpose of avoiding section 7874 . (i) Facts . FA acquires all the DT stock in exchange solely for FA stock. In a transaction related to FA’s acquisition of the DT

October 5, 2009 453 2009–40 I.R.B.

(2d Cir. 1941), cert. denied, 314 U.S. 701 (1942). An investment trust with a single class of ownership interests representing undivided beneficial interests in the assets of the trust is classified as a trust if there is no power to vary the investment of the certificate holders.

A power to vary the investment of the certificate holders exists where there is a managerial power, under the trust instrument, that enables a trust to take advantage of variations in the market to improve the investment of the investors. See North American Bond Trust, 122 F.2d at 546.

In previous published guidance, the IRS and the Treasury Department have identified situations in which a power to vary is determined not to be present. For example, in Rev. Rul. 73–460, 1973–2 C.B. 424, a sponsor establishes an investment trust to hold municipal bonds. The sponsor has the power, under certain conditions, such as a default by a bond issuer or substantial decline in the market value of certain bonds, to direct the trustee to sell the affected bonds to preserve the sound investment character of the trust. Except in case of default or probable default, the trustee is not permitted to accept any new or substitute bonds from an obligor who is refunding or refinancing bonds held by the investment trust. The trust agreement also requires that moneys in the interest and principal accounts must be distributed to certificate holders. Rev. Rul. 73–460 concludes that a power to vary is not necessarily present if there is a power to dispose of trust assets to preserve the value of the trust in situations where, for example default has occurred or there is a substantial decline in the value of the assets provided that the proceeds of the sale are distributed to certificate holders and are not reinvested in additional assets. Rev. Rul. 73–460 also concludes that a power to accept an issuer’s offer to exchange or substitute existing obligations held by the investment trust pursuant to a plan for the refunding or refinancing of such obligations in situations where the issuer has already defaulted or the occurrence of default is probable is not a power to vary.

In Rev. Rul. 90–63, 1990–2 C.B. 270, a trustee has the power to consent to changes in the credit support of debt obligations held by the trust, but the power is exercisable only if the trustee reasonably believes that the changes are needed to maintain