[Federal Register: August 12, 2004 (Volume 69, Number 155)]
[Proposed Rules]
[Page 49836-49840]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr12au04-21]
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DEPARTMENT OF THE TREASURY
Internal Revenue Service
26 CFR Part 1
[REG-106889-04]
RIN 1545-BD31
Reorganizations Under Section 368(a)(1)(E) or (F)
AGENCY: Internal Revenue Service, Treasury.
ACTION: Notice of proposed rulemaking.
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SUMMARY: This document contains proposed regulations that provide
guidance regarding the requirements for a transaction to qualify as a
reorganization under section 368(a)(1)(E) or (F) of the Internal
Revenue Code. The proposed regulations will affect corporations and
their shareholders.
DATES: Written or electronic comments and requests for a public hearing
must be received by November 10, 2004.
ADDRESSES: Send submissions to: CC:PA:LPD:PR (REG-106889-04), room
5203, Internal Revenue Service, PO Box 7604, Ben Franklin Station,
Washington, DC 20044. Submissions may be hand-delivered Monday through
Friday between the hours of 8 a.m. and 4 p.m. to CC:PA:LPD:PR (REG-
106889-04), Courier's Desk, Internal Revenue Service, 1111 Constitution
Avenue, NW., Washington, DC, or sent electronically, via the Internal
Revenue Service Internet site at http://www.irs.gov/regs or via the Federal eRulemaking Portal at http://www.regulations.gov (IRS-REG-
106889-04).
FOR FURTHER INFORMATION CONTACT: Concerning the proposed regulations,
Robert B. Gray, (202) 622-7550; concerning submissions of comments, Guy
R. Traynor, (202) 622-7180 (not toll-free numbers).
SUPPLEMENTARY INFORMATION:
Background and Explanation of Provisions
In general, upon the exchange of property, gain or loss must be
accounted for if the new property differs materially, in kind or
extent, from the old property. See Internal Revenue Code (Code) Sec.
1001; Sec. 1.368-1(b). The purpose of the reorganization provisions of
the Internal Revenue Code (the Code) is to except from the general rule
certain specifically described exchanges that are required by business
exigencies and effect only a readjustment of continuing interests in
property under modified corporate forms. See Sec. 1.368-1(b).
Section 368(a)(1)(E) provides that the term reorganization includes
a recapitalization (an E reorganization). A recapitalization has been
defined as a ``reshuffling of a capital structure within the framework
of an existing corporation.'' Helvering v. Southwest Consolidated
Corp., 315 U.S. 194 (1942).
Section 368(a)(1)(F) provides that the term reorganization includes
a mere change in identity, form, or place of organization of one
corporation, however effected (an F reorganization). One court has
described the F reorganization as follows:
[The F reorganization] encompass[es] only the simplest and least
significant of corporate changes. The (F)-type reorganization
presumes that the surviving corporation is the same corporation as
the predecessor in every respect, except for minor or technical
differences. For instance, the (F) reorganization typically has been
understood to comprehend only such insignificant modifications as
the reincorporation of the same corporate business with the same
assets and the same stockholders surviving under a new charter
either in the same or in a different State, the renewal of a
corporate charter having a limited life, or the conversion of a
U.S.-chartered savings and loan association to a State-chartered
institution.
Berghash v. Commissioner, 43 T.C. 743, 752 (1965) (citation and
footnotes omitted), aff'd, 361 F.2d 257 (2nd Cir. 1966).
To qualify as a reorganization, a transaction must generally
satisfy not only the statutory requirements of the reorganization
provisions but also certain nonstatutory requirements, including the
continuity of interest and continuity of business enterprise
requirements. See Sec. 1.368-1(b). The purpose of the continuity
requirements is to ensure that reorganizations are limited to
readjustments of continuing interests in property under modified
corporate form and to prevent transactions that resemble sales from
qualifying for nonrecognition of gain or loss available to corporate
reorganizations. Sec. 1.368-1(d)(1) and (e)(1); see also LeTulle v.
Scofield, 308 U.S. 415 (1940); Helvering v. Minnesota Tea Co., 296 U.S.
378 (1935); Pinellas Ice & Cold Storage Co. v. Commissioner, 287 U.S.
462 (1933).
Despite the general rule, the courts and the Service have taken the
position that the continuity of interest and continuity of business
enterprise requirements need not be satisfied for a transaction to
qualify as an E reorganization. See Hickok v. Commissioner, 32 T.C. 80
(1959); Rev. Rul. 82-34 (1982-1 C.B. 59); Rev. Rul. 77-415 (1977-2 C.B.
311). In Revenue Rulings 77-415 and 82-34, the IRS reasoned that the
continuity of interest and continuity of business enterprise
requirements are necessary in an acquisitive reorganization to ensure
that the transaction does not involve an otherwise taxable transfer of
stock or assets, but that they are not necessary when the transaction
involves only a single corporation.
Although an F reorganization may involve an actual or deemed
transfer of assets from one corporation to another, such a transaction
effectively involves only one corporation. In this way, an F
reorganization is much like an E
[[Page 49837]]
reorganization, which can only involve one corporation even in form. As
a result, an F reorganization is treated for most purposes of the Code
as if the reorganized corporation were the same entity as the
corporation in existence before the reorganization. Consequently, the
taxable year of the corporation does not end on the date of the
transfer, and the losses of the reorganized corporation can be carried
back to offset income of its predecessor. See Sec. 1.381(b)-1(a)(2).
Nonetheless, courts have applied the continuity requirements in
determining whether a transaction qualifies as an F reorganization.
See, e.g., Pridemark, Inc. v. Commissioner, 345 F.2d 35 (4th Cir. 1965)
(stating that the application of the F reorganization statute is
limited to cases where the corporate enterprise continues
uninterrupted, except perhaps for a distribution of some of its liquid
assets); Yoc Heating Corp. v. Commissioner, 61 T.C. 168 (1973) (holding
that continuity of interest is required for an F reorganization).
The Service and the Treasury Department have considered whether
continuity of interest and continuity of business enterprise should be
requirements of an F reorganization. Because F reorganizations involve
only the slightest change in a corporation and do not resemble sales,
the Service and the Treasury Department have concluded that applying
the continuity of interest and continuity of business enterprise
requirements to transactions that would otherwise qualify as F
reorganizations is not necessary to protect the policies underlying the
reorganization provisions. Therefore, these proposed regulations
provide that a continuity of interest and a continuity of business
enterprise are not required for a transaction to qualify as an F
reorganization. In addition, to reflect the IRS' position in Revenue
Rulings 77-415 and 82-34, these proposed regulations provide that a
continuity of interest and a continuity of business enterprise are not
required for a transaction to qualify as an E reorganization.
In light of the proposed rules regarding the application of the
continuity requirements to transactions that otherwise qualify as F
reorganizations, the IRS and the Treasury Department believe it is
desirable to provide guidance regarding the characteristics of F
reorganizations. These regulations propose such criteria.
Consistent with section 368(a)(1)(F), the proposed regulations
provide that, to qualify as an F reorganization, a transaction must
result in a mere change in identity, form, or place of organization of
one corporation. The proposed regulations further provide that a
transaction that involves an actual or deemed transfer is a mere change
only if four requirements are satisfied. First, all the stock of the
resulting corporation, including stock issued before the transfer, must
be issued in respect of stock of the transferring corporation. Second,
there must be no change in the ownership of the corporation in the
transaction, except a change that has no effect other than that of a
redemption of less than all the shares of the corporation. Third, the
transferring corporation must completely liquidate in the transaction.
Fourth, the resulting corporation must not hold any property or have
any tax attributes (including those specified in section 381(c))
immediately before the transfer.
The first two requirements reflect the Supreme Court's holding in
Helvering v. Southwest Consolidated, 315 U.S. 194 (1942), that a
transaction that shifts the ownership of the proprietary interests in a
corporation cannot be a mere change. These requirements prevent a
transaction that involves the introduction of a new shareholder or new
capital into the corporation from qualifying as an F reorganization.
Such an introduction may occur, for example, when a new shareholder
contributes assets to the resulting corporation in exchange for stock
before a merger of the transferring corporation into the resulting
corporation. Notwithstanding these requirements, the proposed
regulations permit the resulting corporation's issuance of a nominal
amount of stock not in respect of stock of the transferring corporation
to facilitate the organization of the resulting corporation. This rule
is designed to permit reincorporation in a jurisdiction that requires,
for example, minimum capitalization, two or more shareholders, or
ownership of shares by directors. It is also intended to permit a
transfer of assets to certain pre-existing entities.
The second requirement allows changes of ownership that have no
effect other than a redemption of less than all the shares of the
corporation to reflect the case law holding that certain transactions
qualify as F reorganizations even if shareholders are redeemed in the
transaction. See Reef Corp. v. U.S., 368 F.2d 125 (5th Cir. 1966)
(holding that a redemption of 48 percent of the stock of a corporation
that occurred during a change in place of incorporation did not cause
the transaction to fail to qualify as an F reorganization); cf. Casco
Products Corp. v. Commissioner, 49 T.C. 32 (1967) (holding that the
surviving corporation in a merger was the continuation of the merging
corporation for purposes of allowing a loss carryback, despite the
forced redemption of nine percent of the stock of the merging
corporation).
The third requirement (providing for the liquidation of the
transferring corporation) and the fourth requirement (limiting the
assets the resulting corporation may hold immediately before the
transfer) reflect the statutory requirement that an F reorganization
involve only one corporation. Although the proposed regulations
generally require that the transferring corporation completely
liquidate in the transaction, they do not require the transferring
corporation to legally dissolve, thereby facilitating preservation of
the value of the transferring corporation's charter. Further, to
accommodate transactions in jurisdictions where it is customary to
preserve pre-existing entities for future use rather than create new
ones, the proposed regulations permit the retention of a nominal amount
of assets for the sole purpose of preserving the transferring
corporation's legal existence.
Although the proposed regulations generally require that the
resulting corporation not hold any property or have any tax attributes
immediately before the transfer, they do allow the resulting
corporation to hold or to have held a nominal amount of assets to
facilitate its organization or preserve its existence, and to have tax
attributes related to these assets. In addition, to accommodate
transactions involving the refinancing of debt or the leveraged
redemption of shareholders, the proposed regulations provide that this
requirement will not be violated if, before the transfer, the resulting
corporation holds the proceeds of borrowings undertaken in connection
with the transaction.
As described above, section 368(a)(1)(F) provides that an F
reorganization includes a mere change in identity, form, or place of
organization of one corporation, however effected. The IRS and the
Treasury Department believe that the inclusion of the words ``however
effected'' in the statutory definition of an F reorganization reflects
a Congressional intent to treat as an F reorganization a series of
transactions that together result in a mere change. The proposed
regulations reflect this view by providing that a series of related
transactions that together result in a mere change may qualify as an F
reorganization.
The IRS and the Treasury Department also recognize that a
reorganization qualifying under section 368(a)(1)(F)
[[Page 49838]]
may be a step in a larger transaction that effects more than a mere
change. For example, in Revenue Ruling 96-29 (1996-1 C.B. 50), the IRS
ruled that a reincorporation qualified as an F reorganization even
though it was a step in a transaction in which the reincorporated
entity issued common stock in a public offering and redeemed stock
having a value of 40 percent of the aggregate value of its outstanding
stock before the offering. In the same ruling, the IRS ruled that a
reincorporation of a corporation in another state qualified as an F
reorganization even though it was a step in a transaction in which the
reincorporated entity acquired the business of another entity.
Consistent with Revenue Ruling 96-29, the proposed regulations
provide that related events preceding or following the transaction or
series of transactions that constitute a mere change do not cause that
transaction or series of transactions to fail to qualify as an F
reorganization. The proposed regulations further provide that the
qualification of the mere change as an F reorganization does not alter
the treatment of the larger transaction. For example, if a redemption
of stock occurs in a transaction that qualifies as an F reorganization
and the F reorganization is part of a plan that includes a subsequent
merger, the step or series of steps constituting the F reorganization
will not alter the tax consequences of the subsequent merger.
A number of commentators have questioned whether distributions of
money or other property in an F reorganization are distributions to
which section 356 applies. The IRS and the Treasury Department believe
it is appropriate to treat such distributions as transactions separate
from the F reorganization, even if they occur during the F
reorganization. See, e.g., Sec. 1.301-1(l). Accordingly, these
proposed regulations provide that if a shareholder receives money or
other property (including in exchange for its shares) from the
transferring or resulting corporation in a transaction that constitutes
an F reorganization, the money or other property is treated as
distributed by the transferring corporation immediately before the
transaction. The tax treatment of such distributions is governed by
sections 301 and 302, and section 356 does not apply to such
distributions. The IRS and the Treasury Department believe that the
same rule should apply in the context of E reorganizations. Comments
are requested on whether there are some E reorganizations to which this
treatment should not apply.
These regulations are proposed to be effective for transactions
that occur on or after the date of these regulations are published as
final regulations in the Federal Register.
Effect on Other Documents
Upon the issuance of these regulations as final regulations, Rev.
Rul. 66-284 (1966-2 C.B. 115), Rev. Rul. 74-36 (1974-1 C.B. 85), Rev.
Rul. 77-415 (1977-2 C.B. 311), Rev. Rul. 77-479 (1977-2 C.B. 119), Rev.
Rul. 79-250 (1979-2 C.B. 156), Rev. Rul. 82-34 (1982-1 C.B. 59), and
Rev. Rul. 96-29 (1996-1 C.B. 50), will be obsoleted.
Special Analyses
It has been determined that this notice of proposed rulemaking 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) of the Administrative Procedure Act
(5 U.S.C. chapter 5) does not apply to these regulations, and, because
these regulations do not impose a collection of information on small
entities, the Regulatory Flexibility Act (5 U.S.C. chapter 6) does not
apply. Pursuant to section 7805(f) of the Code, this notice of proposed
rulemaking will be submitted to the Chief Counsel for Advocacy of the
Small Business Administration for comment on its impact on small
businesses.
Comments and Requests for a Public Hearing
Before these proposed regulations are adopted as final regulations,
consideration will be given to any written (a signed original and eight
(8) copies) or electronic comments that are submitted timely to the
Service. The IRS and Treasury Department request comments on the
clarity of the proposed rules and how they can be made easier to
understand. All comments will be available for public inspection and
copying. A public hearing will be scheduled if requested in writing by
any person that timely submits written comments. If a public hearing is
scheduled, notice of the date, time, and place for the public hearing
will be published in the Federal Register.
Drafting Information
The principal author of these proposed regulations is Robert B.
Gray of the Office of Associate Chief Counsel (Corporate). However,
other personnel from the Service and Treasury Department participated
in their development.
List of Subjects 26 CFR Part 1
Income taxes, Reporting and recordkeeping requirements.
Proposed Amendments to the Regulations
Accordingly, 26 CFR part 1 is proposed to be amended as follows:
PART 1--INCOME TAXES
Paragraph 1. The authority citation for part 1 continues to read,
in part, as follows:
Authority: 26 U.S.C. 7805 * * *
Par. 2. Section 1.368-1(b) is amended by adding a sentence after
the third sentence to read as follows:
Sec. 1.368-1 Purpose and scope of exception of reorganization
exchanges.
* * * * *
(b) Purpose. * * * Notwithstanding the previous sentence, for
transactions on or after [the date these regulations are published as
final regulations in the Federal Register], a continuity of the
business enterprise and a continuity of interest are not required for a
transaction to qualify as a reorganization under section 368(a)(1)(E)
or (F). * * *
* * * * *
Par. 3. Section 1.368-2 is amended by:
1. Adding and reserving new paragraph (l).
2. Adding new paragraph (m).
The addition reads as follows:
Sec. 1.368-2 Definition of terms.
* * * * *
(l) [Reserved].
(m) Qualification as a reorganization under section 368(a)(1)(F)--
(1) Mere change--(i) In general. To qualify as a reorganization under
section 368(a)(1)(F), a transaction must result in a mere change in
identity, form, or place of organization of one corporation (``mere
change''). A transaction that involves an actual or deemed transfer is
a mere change only if--
(A) All the stock of the resulting corporation, including stock
issued before the transfer, is issued in respect of stock of the
transferring corporation;
(B) There is no change in the ownership of the corporation in the
transaction, except a change that has no effect other than that of a
redemption of less than all the shares of the corporation;
(C) The transferring corporation completely liquidates in the
transaction; and
(D) The resulting corporation does not hold any property or have
any tax attributes (including those specified in
[[Page 49839]]
section 381(c)) immediately before the transfer.
(ii) Exceptions and special rules--(A) Transferring corporation.
Legal dissolution of the transferring corporation is not required, and
the mere retention of a nominal amount of assets for the sole purpose
of preserving the corporation's legal existence will not disqualify the
transaction as a mere change.
(B) Resulting corporation. A transaction will not fail to be a mere
change solely because the resulting corporation, to facilitate its
organization, issues a nominal amount of stock other than in respect of
stock of the transferring corporation. At the time of or before the
transfer, the resulting corporation may hold or have held a nominal
amount of assets to facilitate its organization or preserve its
existence as a corporation, and may have tax attributes related to
holding such assets. Moreover, the resulting corporation may hold the
proceeds of borrowings undertaken in connection with the transaction.
(2) Non-application of continuity of interest and continuity of
business enterprise requirements. A continuity of the business
enterprise and a continuity of interest are not required for a
transaction to qualify as a reorganization under section 368(a)(1)(F).
See Sec. 1.368-1(b).
(3) Related transactions--(i) Series of transactions. A series of
related transactions that together result in a mere change may qualify
as a reorganization under section 368(a)(1)(F).
(ii) Mere change within a larger transaction. A reorganization
under section 368(a)(1)(F) may occur within a larger transaction that
effects more than a mere change. Related events that precede or follow
the transaction or series of transactions that constitutes a mere
change will not cause that transaction or series of transactions to
fail to qualify as a reorganization under section 368(a)(1)(F).
Qualification of the mere change as a reorganization under section
368(a)(1)(F) will not alter the treatment of the larger transaction.
(4) Treatment of distributions. If a shareholder receives money or
other property (including in exchange for its shares) from the
transferring or resulting corporation in a transaction that constitutes
a reorganization under section 368(a)(1)(F), the money or other
property is treated as distributed by the transferring corporation
immediately before the transaction, and section 356(a) does not apply
to such distribution. See, e.g., Sec. 1.301-1(l).
(5) Examples. The following examples illustrate the application of
this paragraph (m). In all examples, assume that each transaction is
entered into for a valid business purpose and that all corporations are
domestic corporations, unless stated otherwise. The examples are as
follows:
Example 1. C owns all of the stock of W, a State A corporation.
The net value of W's assets and liabilities is $1,000,000. V, a
State B corporation, seeks to acquire the assets of W. To effect the
acquisition, V and W enter into an agreement under which V will
contribute $1,000,000 to U, a newly formed corporation of which V is
the sole shareholder, and W will merge into U. In the merger, C
surrenders his W stock in exchange for the $1,000,000 V contributed
to U. After the merger, U holds all of the assets and liabilities of
W. However, the U stock is not issued in respect of the W stock as
required by paragraph (m)(1)(i)(A) of this section, and the
transaction results in a change in the ownership of W that has an
effect other than that of a redemption of some of the W shares in
violation of paragraph (m)(1)(i)(B) of this section. Therefore, the
merger of W into U is not a mere change and does not qualify as a
reorganization under section 368(a)(1)(F).
Example 2. A and B own 75 and 25 percent, respectively, of the
stock of X, a State A corporation. The management of X determines
that it would be in the best interest of X to reorganize under the
laws of State B. Accordingly, X forms Y, a State B corporation, and
X and Y enter into an agreement under which X will merge into Y. A
does not wish to own stock in Y. In the merger, A surrenders her X
stock in exchange for cash from X from X's cash reserves, and B
exchanges all of his X stock for all the stock of Y. Without regard
to A's surrender of her stock in X, the merger of X into Y is a mere
change of X. The change in ownership caused by A's surrender of her
stock in X has no effect other than that of a redemption of less
than all the X shares as described in paragraph (m)(1)(i)(B) of this
section. Therefore, the merger of X into Y is a mere change and
qualifies as a reorganization under section 368(a)(1)(F).
Example 3. D owns all of the stock of S, a Country A
corporation. The management of S determines that it would be in the
best interest of S to reorganize under the laws of Country B. Under
Country B law, a corporation must have at least two shareholders to
enjoy limited liability. D is advised by a Country B attorney that
the new corporation should issue one percent of its stock to a
shareholder that is not D's nominee to assure satisfaction of the
two-shareholder requirement. As part of an integrated plan, E
organizes T, a Country B corporation with 1,000 shares of common
stock authorized, and contributes cash to T in exchange for ten of
the common shares. S then merges into T under the laws of Country A
and Country B. Pursuant to the plan of merger, D surrenders his
shares of stock in S in exchange for 990 shares of T common stock.
Without regard to the prior issuance of T stock to E, the merger of
S into T is a mere change of S. The ten shares of stock issued to E
not in respect of the S stock are nominal and used to facilitate the
organization of T within the meaning of paragraph (m)(1)(ii)(B) of
this section. Therefore, the issuance of this stock to a new
shareholder does not cause the merger of S into T to fail to be a
mere change. Accordingly, the merger is a reorganization under
section 368(a)(1)(F).
Example 4. A owns all of the stock of H, a corporation that owns
all of the stock of S, a corporation engaged in a manufacturing
business. H has owned the stock of S for many years. H owns no
assets other than the stock of S. A decides to eliminate the holding
company structure by merging H into S. Because it operates a
manufacturing business, the resulting corporation, S, holds property
and has tax attributes immediately before the transfer. Therefore,
under paragraph (m)(1)(i)(D) of this section, the merger of H into S
is not a mere change and does not qualify as a reorganization under
section 368(a)(1)(F). The same result would occur if, instead of H
merging into S, S merged into H.
Example 5. Corporation P owns all of the stock of S1, a State X
corporation. The management of P determines that it would be in the
best interest of S1 to change its place of incorporation to State Y.
Accordingly, under an integrated plan, P forms S2, a new State Y
corporation, P contributes the S1 stock to S2, and S1 merges into S2
under the laws of State X and State Y. Under paragraph (m)(3)(i) of
this section, a series of transactions that together result in a
mere change of one corporation may qualify as a reorganization under
section 368(a)(1)(F). The contribution of S1 stock to S2 and the
merger of S1 into S2 together constitute a mere change of S1.
Therefore, the transaction qualifies as a reorganization under
section 368(a)(1)(F). S1 is treated as transferring its assets to S2
in exchange for the S2 stock and distributing the S2 stock to P in
exchange for P's S1 stock.
Example 6. Corporation P owns all of the stock of S, a State X
corporation. The management of P determines that it would be in the
best interest of S to change its place of incorporation to State Y.
Accordingly, P forms New S, a State Y corporation. S then merges
into New S under the laws of State X and State Y. As part of the
same plan, P sells all of its stock in New S to an unrelated party.
Without regard to the sale of New S stock, the merger of S into New
S is a mere change within the meaning of paragraph (m)(1) of this
section. Under paragraph (m)(3)(ii) of this section, related events
that precede or follow the transaction or series of transactions
that constitute a mere change do not cause that transaction to fail
to qualify as a reorganization under section 368(a)(1)(F).
Therefore, the sale of the New S stock is disregarded in determining
whether the merger of S into New S is a mere change. Accordingly,
the merger of S into New S is a reorganization under section
368(a)(1)(F).
Example 7. A owns all of the stock of T and none of the stock of
P. P owns all of the stock of S. T and S are State M corporations
engaged in manufacturing businesses. The following transactions
occur pursuant to a single plan. First, T merges into S with A
receiving solely stock in P. Second, P
[[Page 49840]]
changes its state of incorporation to State N by merging into newly
organized New P under the laws of State M and State N. Third, P
redeems all the stock issued to A in respect of his T stock for
cash. Without regard to the other steps, the merger of T into S
qualifies as a reorganization under section 368(a)(1)(A) by reason
of section 368(a)(2)(D). Without regard to the other steps, the
merger of P into New P qualifies as a reorganization under section
368(a)(1)(F). Under paragraph (m)(3)(ii) of this section, related
events that precede or follow the transaction or series of
transactions that constitute a mere change do not cause that
transaction to fail to qualify as a reorganization under section
368(a)(1)(F). Therefore, the merger of P into New P qualifies as a
reorganization under section 368(a)(1)(F). However, under paragraph
(m)(3)(ii) of this section, the qualification of the merger of P
into New P as a reorganization under section 368(a)(1)(F) does not
alter the tax treatment of the merger of T into S. Because the P
shares received by A in respect of the T shares are redeemed for
cash pursuant to the plan, the merger of T into S does not satisfy
the continuity of interest requirement and does not qualify as a
reorganization under section 368(a)(1)(A).
Example 8. Corporation P owns all of the stock of S, a State A
corporation. The management of P determines that it would be in the
best interest of S to change its form from a State A corporation to
a State A limited partnership. Accordingly, P contributes one
percent of the S stock to newly formed LLC, a limited liability
company, in exchange for all of the membership interests in LLC.
Under Sec. 301.7701-3 of this chapter, LLC is disregarded as an
entity separate from its owner, P. Under a State A statute, S
converts to a State A limited partnership. In the conversion, P's
interest as a 99 percent shareholder of S is converted into a 99
percent limited partner interest, and LLC's interest as a one
percent shareholder of S is converted into a one percent general
partner interest. S then elects, under Sec. 301.7701-3(c), to be
classified as a corporation for federal income tax purposes,
effective on the date of the conversion. The conversion of S from a
State A corporation to a State A limited partnership, together with
the election to treat S as a corporation for federal tax purposes,
constitutes a mere change and is a reorganization under section
368(a)(1)(F).
(6) Effective Date. This paragraph (m) applies to transactions
occurring on or after [the date these regulations are published as
final regulations in the Federal Register].
Linda M. Kroening,
Acting Deputy Commissioner for Services and Enforcement.
[FR Doc. 04-18476 Filed 8-11-04; 8:45 am]
BILLING CODE 4830-01-P