SECTION 4. REGULATIONS

TO BE ISSUED UNDER SECTION 368(a)(1)(F)

.01 Overview

The Treasury Department and the IRS have received stakeholder requests to clarify the application of the “identity of stock ownership” requirement for potential F reorganizations in which sales or exchanges (or other dispositions) of transferor or resulting corporation stock occur in close temporal proximity to transactions properly included in the plan of reorganization. For example, stakeholders have requested that the Treasury Department and the IRS provide guidance to clarify the potential effect on F reorganization qualification of sales or exchanges of resulting corporation stock that occur among transaction steps including (i) the formation of the resulting corporation, (ii) a transaction that involves an actual or deemed transfer of property from the transferor corporation to the resulting corporation, and (iii) the liquidation (or deemed liquidation) of the transferor corporation. The Treasury Department and the IRS are of the view that §1.368-2(m) and the most relevant examples set forth in §1.368-2(m)(4)(vi) and (vii) (Examples 6 and 7, respectively) fail to address these issues with sufficient certainty for taxpayers.

.02 Proposed Regulations revising §1.368- 2(m)(1)(ii) (1) Proposed operative rule . The forthcoming proposed regulations would revise §1.368-2(m)(1)(ii) to add at the end the following sentence: “Satisfaction of the identity of stock ownership requirement under this paragraph (m)(1)(ii) would not be affected by a disposition of stock in either the transferor corporation or the resulting corporation if that disposition is not included in the plan of reorganization.”

(2) Proposed example 15 under §1.368- 2(m)(4) . The forthcoming proposed regulations would revise §1.368-2(m)(4) to add at the end the following new paragraph (m)(4)(xv) (Example 15).

“(xv) Example 15. Sales of stock among trans- action steps included in the plan of reorganization— mere change . P is a publicly traded Country A for

eign corporation that has a single class of common stock outstanding. P also is a holding company that owns all the stock of domestic corporation (S). P organizes a domestic corporation (US Corp.), subscribing for stock of US Corp. with nominal consideration. P’s purpose for its organization of US Corp. is to have it serve as a resulting corporation for a potential F reorganization. To effectuate the potential F reorganization, US Corp. creates a merger subsidiary, which merges into P with P surviving as a wholly owned subsidiary of US Corp. (merger). Next, P elects to change its classification for Federal income tax purposes to be classified as a disregarded entity three days after the merger (liquidation). Between the dates of the merger and the liquidation, however, some of the US Corp. shareholders sell their US Corp. shares to persons that are not shareholders of US Corp. prior to sale. The sale of the US Corp. stock is not included in the plan of reorganization for the potential F reorganization. Therefore, the satisfaction of the identity of stock ownership requirement under this paragraph (m)(1)(ii) of this section is not affected by the disposition of stock in US Corp.”