Part I. Rulings — Internal Revenue Bulletin 2010-6

Section 42.—Low-Income Housing Credit

The adjusted applicable federal short-term, midterm, and long-term rates are set forth for the month of February 2010. See Rev. Rul. 2010-6, page 387.

Section 280G.—Golden Parachute Payments

Federal short-term, mid-term, and long-term rates are set forth for the month of February 2010. See Rev. Rul. 2010-6, page 387.

Section 304.—Redemption Through Use of Related Corporations

26 CFR 1.304–4T: Special rule for the use of related corporations to avoid the application of section 304 (temporary).

T.D. 9477

DEPARTMENT OF THE TREASURY Internal Revenue Service 26 CFR Part 1

Use of Controlled Corporations to Avoid the Application of Section 304

AGENCY: Internal Revenue Service (IRS), Treasury.

ACTION: Final and temporary regulations.

SUMMARY: This document contains final and temporary regulations under section 304 of the Internal Revenue Code (Code). The regulations apply to certain transactions that are subject to section 304 but that are entered into with a principal purpose of avoiding the application of section 304 to a corporation that is controlled by the issuing corporation in the transaction, or with a principal purpose of avoiding the application of section 304 to a corporation that controls the acquiring corporation in the transaction. The regulations affect persons treated as receiving distributions in redemption of stock by reason of section 304. The text of the temporary regulations

serves as the text of the proposed regulations (REG–132232–08) in the notice of proposed rulemaking on this subject published in this issue of the Bulletin.

DATES: Effective Date: These regulations are effective on December 30, 2009.

Applicability Date: These regulations apply to acquisitions of stock occurring on or after December 29, 2009.

FOR FURTHER INFORMATION CONTACT: Sean W. Mullaney, (202) 622–3860 (not a toll-free number).

SUPPLEMENTARY INFORMATION:

Background

This document contains amendments to 26 CFR part 1 under section 304 of the Code. Section 304(a)(1) provides generally that, for purposes of sections 302 and 303, if one or more persons are in control of each of two corporations and one such corporation (acquiring corporation) acquires in exchange for property stock of the other corporation (issuing corporation) from the person (or persons) so in control, then, unless section 304(a)(2) applies, the property shall be treated as received in redemption of the stock of the acquiring corporation. Section 304(a)(2) provides generally that, for purposes of sections 302 and 303, if in exchange for property the acquiring corporation acquires stock of the issuing corporation from a shareholder of the issuing corporation and the issuing corporation controls the acquiring corporation, then the shareholder shall be treated as receiving the property in redemption of the stock of the issuing corporation. For purposes of section 304, control means the ownership of stock possessing at least 50 percent of the total combined voting power of all classes of voting stock or at least 50 percent of the total value of shares of all classes of stock. With certain modifications, the constructive ownership rules of section 318 apply for this purpose.

Under section 304(b)(2), the determination of the amount of the property distribution that is a dividend (and the source thereof) is made as if the property were distributed by the acquiring corporation to the

extent of its earnings and profits, and then by the issuing corporation to the extent of its earnings and profits. If the acquiring corporation is foreign, section 304(b)(5) limits the amount of earnings and profits of the acquiring corporation that are taken into account for this purpose.

As part of a broad set of anti-avoidance rules published in the Federal Regis- ter on June 14, 1988 (T.D. 8209, 1988–2 C.B. 174) the IRS and the Treasury Department promulgated §1.304–4T to address transactions that are subject to section 304 but that are entered into with a principal purpose of avoiding the application of section 304 to certain corporations. Specifically, for purposes of determining the amount of a property distribution constituting a dividend (and the source thereof) under section 304(b)(2), the District Director (now known as the Director of Field Operations) is permitted to consider a corporation (deemed acquiring corporation) as having acquired for property the stock of the issuing corporation that is in fact acquired for property by the acquiring corporation, if the deemed acquiring corporation controls the acquiring corporation and if one of the principal purposes for creating, organizing, or funding the acquiring corporation (through capital contributions or debt) is to avoid the application of section 304 to the deemed acquiring corporation.

Explanation of the Provisions

A. Transactions at Issue

The IRS and Treasury Department have become aware of certain transactions that are subject to section 304 but that are entered into with a principal purpose of avoiding the treatment of a corporation as the issuing corporation. In one such transaction, for example, a domestic corporation (USP) wholly owns two foreign corporations (F1 and F2). The basis and fair market value of the F1 stock is $100x. F1 does not have positive earnings and profits (or its earnings and profits for purposes of section 304(b)(2) are limited by section 304(b)(5)) but has at least $100x cash. The basis and fair market value of the F2 stock is $100x and F2 has earnings

2010–6 I.R.B. 385 February 8, 2010

Amendments to the Regulations

Accordingly, 26 CFR part 1 is amended as follows:

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 * * * Par. 2. Section 1.304–4 is added to read as follows:

§1.304–4 Special rule for the use of related corporations to avoid the application of section 304 .

[Reserved]. For further guidance, see §1.304–4T(a) through (d).

Par. 3. Section 1.304–4T is revised to read as follows:

§1.304–4T Special rule for the use of related corporations to avoid the application of section 304 (temporary) .

(a) Scope and purpose . This section applies to determine the amount of a property distribution constituting a dividend (and the source thereof) under section 304(b)(2), for certain transactions involving controlled corporations. The purpose of this section is to prevent the avoidance of the application of section 304 to a controlled corporation.

(b) Amount and source of dividend . For purposes of determining the amount constituting a dividend (and source thereof) under section 304(b)(2), the following rules shall apply:

(1) Deemed acquiring corporation . A corporation (deemed acquiring corporation) shall be treated as acquiring for property the stock of a corporation (issuing corporation) acquired for property by another corporation (acquiring corporation) that is controlled by the deemed acquiring corporation, if a principal purpose for creating, organizing, or funding the acquiring corporation by any means (including, through capital contributions or debt) is to avoid the application of section 304 to the deemed acquiring corporation. See paragraph (c) Example 1 of this section for an illustration of this paragraph.

(2) Deemed issuing corporation . The acquiring corporation shall be treated as

and profits of at least $100x. USP forms a new foreign corporation (F3) and contributes the stock of F2 to F3 in exchange for F3 stock. In a transaction subject to section 304(a)(1), USP then transfers the stock of F3 to F1 in exchange for $100x cash. Because neither F1 (the acquiring corporation) nor F3 (the issuing corporation) has positive earnings and profits, USP reports the $100x cash received in redemption of the shares deemed issued by F1 under section 304(a)(1) as a return of basis under section 301(c)(2).

B. Anti-Avoidance Rule Applicable to Deemed Issuing Corporations

The IRS and Treasury Department believe that an anti-avoidance rule similar to §1.304–4T, but that applies in the case of a transaction entered into with a principal purpose of avoiding the treatment of a corporation as the issuing corporation is appropriate for transactions such as the one described above. Accordingly, the regulations amend §1.304–4T to provide that for purposes of determining the amount of a property distribution that is a dividend (and the source thereof) under section 304(b)(2), the acquiring corporation shall be treated as acquiring for property the stock of a corporation (deemed issuing corporation) that is controlled by the issuing corporation, if, in connection with the acquisition for property of stock of the issuing corporation by the acquiring corporation, the issuing corporation acquired stock of the deemed issuing corporation with a principal purpose of avoiding the application of section 304 to the deemed issuing corporation.

C. Modifications to Current §1.304–4T

Current §1.304–4T applies at the discretion of the District Director. The IRS and the Treasury Department believe the anti-avoidance rule of current §1.304–4T should be self-executing. Thus, current §1.304–4T is amended accordingly.

Current §1.304–4T applies when “one of the principal purposes” for the transaction is to avoid the application of section 304. The regulations included in this document apply when “a principal purpose” for the transaction is to avoid the application of section 304. The IRS and the Treasury Department do not view this modification as a substantive change.

Finally, and as noted above, current §1.304–4T applies if one of the principal purposes for creating, organizing, or funding the acquiring corporation, through capital contributions or debt, is to avoid the application of section 304 to the deemed acquiring corporation. The regulations included in this document clarify that this rule may apply in cases where the funding is from an unrelated party. For example, the regulations may apply when the deemed acquiring corporation facilitates the repayment of an obligation incurred by the acquiring corporation (even if such obligation is with respect to a borrowing from an unrelated party) to acquire the stock of the issuing corporation.

D. Effective/Applicability Dates

The regulations apply to acquisitions occurring on or after December 29, 2009. No inference is intended as to the potential applicability of other Code or regulatory provisions or judicial doctrines (including step transaction or substance over form) to transactions described in the regulations.

Special Analyses

It has been determined that this Treasury decision 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) and (d) of the Administrative Procedure Act (5 U.S.C. chapter 5) do not apply to these regulations. For applicability of the Regulatory Flexibility Act (5 U.S.C. chapter 6), refer to the Special Analyses section of the preamble and to the cross-referenced notice of proposed rulemaking published elsewhere in this issue of the Bulletin. Pursuant to section 7805(f) of the Code, these regulations have been submitted to the Chief Counsel for Advocacy of the Small Business Administration for comment on its impact on small business.

Drafting Information

The principal author of the regulations is Sean W. Mullaney of the Office of Associate Chief Counsel (International). However, other personnel from the IRS and the Treasury Department participated in their development.

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February 8, 2010 386 2010–6 I.R.B.

acquiring for property the stock of a corporation (deemed issuing corporation) controlled by the issuing corporation if, in connection with the acquisition for property of stock of the issuing corporation by the acquiring corporation, the issuing corporation acquired stock of the deemed issuing corporation with a principal purpose of avoiding the application of section 304 to the deemed issuing corporation. See paragraph (c) Example 2 of this section for an illustration of this paragraph.

Example 1 . (i) Facts . P, a domestic corporation, wholly owns CFC1, a controlled foreign corporation with substantial accumulated earnings and profits. CFC1 is organized in Country X, which imposes a high rate of tax on the income of CFC1. P also wholly owns CFC2, a controlled foreign corporation with accumulated earnings and profits of $200x. CFC2 is organized in Country Y, which imposes a low rate of tax on the income of CFC2. P wishes to own all of its foreign corporations in a direct chain and to repatriate the cash of CFC2. In order to avoid having to obtain Country X approval for the acquisition of CFC1 (a Country X corporation) by CFC2 (a Country Y corporation) and to avoid the dividend distribution from CFC2 to P that would result if CFC2 were the acquiring corporation, P causes CFC2 to form CFC3 in Country X and to contribute $100x to CFC3. CFC3 then acquires all of the stock of CFC1 from P for $100x.

(ii) Result . Because a principal purpose for creating, organizing or funding CFC3 (acquiring corporation) is to avoid the application of section 304 to CFC2 (deemed acquiring corporation), under paragraph (b)(1) of this section, for purposes of determining the amount of the $100x distribution constituting a dividend (and source thereof) under section 304(b)(2), CFC2 shall be treated as acquiring the stock of CFC1 (issuing corporation) from P for $100x. As a result, P receives a $100x distribution, out of the earnings and profits of CFC2, to which section 301(c)(1) applies.

Example 2 . (i) Facts . P, a domestic corporation, wholly owns CFC1, a controlled foreign corporation with substantial accumulated earnings and profits. The CFC1 stock has a basis of $100x. CFC1 is organized in Country X. P also wholly owns CFC2, a controlled foreign corporation with zero accumulated earnings and profits. CFC2 is organized in Country Y. P wishes to own all of its foreign corporations in a direct chain and to repatriate the cash of CFC2. In order to avoid having to obtain Country X approval for the acquisition of CFC1 (a Country X corporation) by CFC2 (a Country Y corporation) and to avoid a dividend distribution from CFC1 to P, P forms a new corporation (CFC3) in Country X and transfers the stock of CFC1 to CFC3 in exchange for CFC3 stock. P then transfers the stock of CFC3 to CFC2 in exchange for $100x.

(ii) Result . Because a principal purpose for the transfer of the stock of CFC1 (deemed issuing corporation) by P to CFC3 (issuing corporation) is to avoid the application of section 304 to CFC1, under

paragraph (b)(2) of this section, for purposes of determining the amount of the $100x distribution constituting a dividend (and source thereof) under section 304(b)(2), CFC2 (acquiring corporation) shall be treated as acquiring the stock of CFC1 from P for $100x . As a result, P receives a $100x distribution, out of the earnings and profits of CFC1, to which section 301(c)(1) applies.

(d) Effective/applicability date . This section applies to acquisitions of stock occurring on or after December 29, 2009. See §1.304–4T, as contained in 26 CFR part 1 revised as of April 1, 2008, for acquisitions of stock occurring on or after June 14, 1988, and before December 29, 2009. (e) Expiration date . This section expires on or before December 28, 2012.

Linda E. Stiff, Deputy Commissioner for Services and Enforcement.

Approved December 18, 2009.

Michael F. Mundaca, Acting Assistant Secretary of the Treasury (Tax Policy).

(Filed by the Office of the Federal Register on December 29, 2009, 8:45 a.m., and published in the issue of the Federal Register for December 30, 2009, 74 F.R. 69021)

Section 382.—Limitation on Net Operating Loss Carryforwards and Certain Built-In Losses Following Ownership Change

The adjusted applicable federal long-term rate is set forth for the month of February 2010. See Rev. Rul. 2010-6, page 387.

Section 412.—Minimum Funding Standards

The adjusted applicable federal short-term, midterm, and long-term rates are set forth for the month of February 2010. See Rev. Rul. 2010-6, page 387.

Section 467.—Certain Payments for the Use of Property or Services

The adjusted applicable federal short-term, midterm, and long-term rates are set forth for the month of February 2010. See Rev. Rul. 2010-6, page 387.

Section 468.—Special Rules for Mining and Solid Waste Reclamation and Closing Costs

The adjusted applicable federal short-term, midterm, and long-term rates are set forth for the month of February 2010. See Rev. Rul. 2010-6, page 387.

Section 482.—Allocation of Income and Deductions Among Taxpayers

Federal short-term, mid-term, and long-term rates are set forth for the month of February 2010. See Rev. Rul. 2010-6, page 387.

Section 483.—Interest on Certain Deferred Payments

The adjusted applicable federal short-term, midterm, and long-term rates are set forth for the month of February 2010. See Rev. Rul. 2010-6, page 387.

Section 642.—Special Rules for Credits and Deductions

Federal short-term, mid-term, and long-term rates are set forth for the month of February 2010. See Rev. Rul. 2010-6, page 387.

Section 807.—Rules for Certain Reserves

The adjusted applicable federal short-term, midterm, and long-term rates are set forth for the month of February 2010. See Rev. Rul. 2010-6, page 387.

Section 846.—Discounted Unpaid Losses Defined

The adjusted applicable federal short-term, midterm, and long-term rates are set forth for the month of February 2010. See Rev. Rul. 2010-6, page 387.

Section 1274.—Determi- nation of Issue Price in the Case of Certain Debt Instru- ments Issued for Property

(Also Sections 42, 280G, 382, 412, 467, 468, 482, 483, 642, 807, 846, 1288, 7520, 7872.)

Federal rates; adjusted federal rates; adjusted federal long-term rate and the long-term exempt rate . For purposes of sections 382, 642, 1274, 1288, and other

2010–6 I.R.B. 387 February 8, 2010

ever, under section 42(b)(2), the applicable percentage for non-federally subsidized new buildings placed in service after July 30, 2008, and before December 31, 2013, shall not be less than 9%. Finally, Table 5 contains the federal rate for determining the present value of an annuity, an interest for life or for a term of years, or a remainder or a reversionary interest for purposes of section 7520.

sections of the Code, tables set forth the rates for February 2010.

Rev. Rul. 2010–6

This revenue ruling provides various prescribed rates for federal income tax purposes for February 2010 (the current month). Table 1 contains the short-term, mid-term, and long-term applicable federal rates (AFR) for the current month for purposes of section 1274(d) of the

Internal Revenue Code. Table 2 contains the short-term, mid-term, and long-term adjusted applicable federal rates (adjusted AFR) for the current month for purposes of section 1288(b). Table 3 sets forth the adjusted federal long-term rate and the long-term tax-exempt rate described in section 382(f). Table 4 contains the appropriate percentages for determining the low-income housing credit described in section 42(b)(1) for buildings placed in service during the current month. How

REV. RUL. 2010–6 TABLE 1

Applicable Federal Rates (AFR) for February 2010

Period for Compounding

Annual Semiannual Quarterly Monthly

Short-term

AFR .72% .72% .72% .72% 110% AFR .79% .79% .79% .79% 120% AFR .86% .86% .86% .86% 130% AFR .94% .94% .94% .94%

Mid-term

AFR 2.82% 2.80% 2.79% 2.78% 110% AFR 3.10% 3.08% 3.07% 3.06% 120% AFR 3.39% 3.36% 3.35% 3.34% 130% AFR 3.67% 3.64% 3.62% 3.61% 150% AFR 4.24% 4.20% 4.18% 4.16% 175% AFR 4.96% 4.90% 4.87% 4.85%

Long-term

AFR 4.44% 4.39% 4.37% 4.35% 110% AFR 4.89% 4.83% 4.80% 4.78% 120% AFR 5.34% 5.27% 5.24% 5.21% 130% AFR 5.79% 5.71% 5.67% 5.64%

REV. RUL. 2010–6 TABLE 2

Adjusted AFR for February 2010

Period for Compounding

Annual Semiannual Quarterly Monthly

Short-term adjusted .54% .54% .54% .54% AFR

Mid-term adjusted AFR 1.84% 1.83% 1.83% 1.82%

Long-term adjusted 4.02% 3.98% 3.96% 3.95% AFR

February 8, 2010 388 2010–6 I.R.B.

REV. RUL. 2010–6 TABLE 3

Rates Under Section 382 for February 2010

Adjusted federal long-term rate for the current month 4.02%

Long-term tax-exempt rate for ownership changes during the current month (the highest of the adjusted federal long-term rates for the current month and the prior two months.) 4.14%

REV. RUL. 2010–6 TABLE 4

Appropriate Percentages Under Section 42(b)(1) for February 2010

Note: Under Section 42(b)(2), the applicable percentage for non-federally subsidized new buildings placed in service after July 30, 2008, and before December 31, 2013, shall not be less than 9%.

Appropriate percentage for the 70% present value low-income housing credit 7.84%

Appropriate percentage for the 30% present value low-income housing credit 3.36%

REV. RUL. 2010–6 TABLE 5

Rate Under Section 7520 for February 2010

Applicable federal rate for determining the present value of an annuity, an interest for life or a term of years, or a remainder or reversionary interest 3.4%

Section 7872.—Treatment of Loans With Below-Market Interest Rates

The adjusted applicable federal short-term, midterm, and long-term rates are set forth for the month of February 2010. See Rev. Rul. 2010-6, page 387.

Section 1288.—Treatment of Original Issue Discount on Tax-Exempt Obligations

The adjusted applicable federal short-term, midterm, and long-term rates are set forth for the month of February 2010. See Rev. Rul. 2010-6, page 387.

Section 7520.—Valuation Tables

The adjusted applicable federal short-term, midterm, and long-term rates are set forth for the month of February 2010. See Rev. Rul. 2010-6, page 387.

2010–6 I.R.B. 389 February 8, 2010