The Solely for Voting Stock Requirement in
Certain Corporate Reorganizations

DEPARTMENT OF THE TREASURY
Internal Revenue Service 26 CFR Part 1 [TD 8885] RIN 1545-AW55

TITLE: The Solely for Voting Stock Requirement in Certain Corporate
Reorganizations

AGENCY: Internal Revenue Service (IRS), Treasury.

ACTION: Final regulation.

SUMMARY: This document contains final regulations relating to the
solely for voting stock requirement in certain corporate
reorganizations under section 368(a)(1)(C). The final regulations
provide that a prior acquisition of a target corporation's stock by
an acquiring corporation generally will not prevent the solely for
voting stock requirement in a A C @ reorganization of the target
corporation and the acquiring corporation from being satisfied. They
affect persons engaging in certain transactions occurring after
December 31, 1999.

DATES: Effective Date: These regulations are effective May 19, 2000.

Applicability Date: These regulations apply to transactions
occurring after December 31, 1999, unless the transaction occurs
pursuant to a written agreement that is (subject to customary
conditions) binding on that date and at all times thereafter.

FOR FURTHER INFORMATION CONTACT: Marnie Rapaport, (202) 622-7550
(not a toll-free number).

SUPPLEMENTARY INFORMATION:

Background

On June 14, 1999, the IRS and Treasury issued a notice of proposed
rulemaking in the Federal Register (64 FR 31770) setting forth rules
relating to the solely for voting stock requirement in
reorganizations under section 368(a)(1)(C). The proposed regulations
provided that prior ownership of stock of a target corporation by an
acquiring corporation will not by itself prevent the solely for
voting stock requirement of a A C @ reorganization from being
satisfied. The regulations propose to reverse the IRS's previous
position that the acquisition of assets of a partially controlled
subsidiary does not qualify as a tax-free A C @ reorganization. See
Rev. Rul. 54-396 (1954-2 C.B.

147). This position subsequently was sustained in litigation in
Bausch & Lomb Optical Co. v. Commissioner, 267 F.2d 75 (2d Cir.),
cert. denied, 361 U.S. 835 (1959) (the Bausch & Lomb doctrine). A
public hearing regarding these proposed regulations was held on
October 5, 1999. Written comments to the notice were received. After
consideration of all the comments, the proposed regulations are
adopted as revised by this Treasury decision.

Explanation of Revisions and Summary of Comments

The Applicability Date

The proposed regulations apply to transactions occurring after the
date that a Treasury decision adopting the regulations is published
in the Federal Register, except that they do not apply to any
transactions occurring pursuant to a written agreement which is
(subject to customary conditions) binding on the date that the
regulations are published as final regulations.in the Federal
Register, and at all times thereafter. A commentator requested that
taxpayers be allowed to apply the proposed regulations to
transactions occurring before the proposed regulations are published
as final regulations.

The IRS and Treasury Department determined that the increased
flexibility that results from the proposed regulations should be
available to taxpayers in structuring transactions before their
publication as final regulations. Accordingly, the IRS and the
Treasury Department issued Notice 2000-1 (2000-2 I.R.B. 288), which
changes the proposed effective date of the proposed regulations to
apply to any transactions occurring after December 31, 1999, unless
the transaction occurs pursuant to a written agreement binding on
that date. Notice 2000-1 further provides that the proposed
regulations, when finalized, will adopt this effective date rule and
that taxpayers may rely on Notice 2000-1 until final regulations are
issued. Accordingly, the final regulations adopt the this effective
date rule.

Finally, Notice 2000-1 provides that taxpayers may request a private
letter ruling permitting them to apply the final regulations to
transactions occurring on or after June 11, 1999 (the date the
proposed regulations were filed with the Federal Register) to which
the final regulations would not otherwise apply, and for which there
was not a written agreement (subject to customary conditions)
binding on June 11, 1999 and at all times thereafter. The Notice
cautions, however, that a private letter ruling will not be issued
unless the taxpayer establishes to the satisfaction of the IRS that
there is not a significant.risk of different parties to the
transaction taking inconsistent positions, for U.S. tax purposes,
with respect to the applicability of the final regulations to the
transaction. Any such requests for a ruling will continue to be
considered. Extension of the Repeal of the Bausch & Lomb Doctrine to
A B @

Reorganizations

A comment was received requesting that the IRS reconsider its
position in Rev. Rul. 69-294 (1969-1 C.B. 110), where the Bausch &
Lomb doctrine was applied to disqualify a purported section 368(a)
(1)(B) reorganization that followed a tax-free section 332
liquidation. In Rev. Rul. 69-294, X owned all of the stock of Y and
Y owned 80 percent of the stock of Z. Y completely liquidated into X
in a section 332 liquidation. As part of the plan, X (now owning 80
percent of the stock of Z) acquired the minority 20 percent stock
interest in Z in exchange for X voting stock in a purported A B @
reorganization. The ruling holds that the exchange with the 20
percent minority shareholders was not a A B @ reorganization. The
rationale is that although the acquisition from the minority
shareholders was A solely for voting stock, @ the liquidation of Y,
as part of the same plan, resulted in X acquiring 80 percent of the
Z stock in exchange for Y stock surrendered back to Y on the
liquidation of Y and not solely in exchange for X voting stock. The
commentator's suggestion is beyond the scope of this regulations
project, which relates to A C @ reorganizations. In light of these
regulations, the IRS and Treasury Department may reconsider Rev.
Rul. 69-294.

Effect on Other Documents.The following publication is obsolete as
of January 1, 2000: Rev. Rul. 54-396 (1954-2 C.B. 147).

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 also has 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. Therefore, a Regulatory Flexibility Analysis is
not required. Pursuant to section 7805(f) of the Internal Revenue
Code, these regulations were 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 these regulations is Marnie Rapaport of the
Office of the Assistant Chief Counsel (Corporate), IRS. However,
other personnel from the IRS and Treasury Department participated in
their development.

List of Subjects in 26 CFR Part 1

Income taxes, Reporting and recordkeeping requirements. Adoption of
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 continues to.read in
part as follows: Authority: 26 U.S.C. 7805 * * *

Par. 2. Section 1.368-2 is amended by adding paragraph (d)(4) to
read as follows:

�1.368-2 Definition of terms.

* * * * *

(d) * * *

(4) (i) For purposes of paragraphs (d)(1) and (2)(ii) of this
section, prior ownership of stock of the target corporation by an
acquiring corporation will not by itself prevent the solely for
voting stock requirement of such paragraphs from being satisfied. In
a transaction in which the acquiring corporation has prior ownership
of stock of the target corporation, the requirement of paragraph (d)
(2)(ii) of this section is satisfied only if the sum of the money or
other property that is distributed in pursuance of the plan of
reorganization to the shareholders of the target corporation other
than the acquiring corporation and to the creditors of the target
corporation pursuant to section 361(b)(3), and all of the
liabilities of the target corporation assumed by the acquiring
corporation (including liabilities to which the properties of the
target corporation are subject), does not exceed 20 percent of the
value of all of the properties of the target corporation. If, in
connection with a potential acquisition by an acquiring corporation
of substantially all of a target corporation's properties, the
acquiring corporation acquires the target corporation's stock for
consideration other than the acquiring corporation's own voting
stock (or voting stock of a corporation in control of the acquiring
corporation if such stock is used in the acquisition of the target
corporation's properties), whether from a shareholder of the target
corporation or the target corporation itself, such consideration is
treated, for purposes of paragraphs (d)(1) and (2) of this section,
as money or other property exchanged by the acquiring corporation
for the target corporation's properties. Accordingly, the
transaction will not qualify under section 368(a)(1)(C) unless,
treating such consideration as money or other property, the
requirements of section 368(a)(2)(B) and paragraph (d)(2)(ii) of
this section are met. The determination of whether there has been an
acquisition in connection with a potential reorganization under
section 368(a)(1)(C) of a target corporation's stock for
consideration other than an acquiring corporation's own voting stock
(or voting stock of a corporation in control of the acquiring
corporation if such stock is used in the acquisition of the target
corporation's properties) will be made on the basis of all of the
facts and circumstances.

(ii) The following examples illustrate the principles of this
paragraph (d)(4):

Example 1. Corporation P (P) holds 60 percent of the Corporation T
(T) stock that P purchased several years ago in an unrelated
transaction. T has 100 shares of stock outstanding.

The other 40 percent of the T stock is owned by Corporation X (X),
an unrelated corporation. T has properties with a fair market value
of $110 and liabilities of $10. T transfers all of its properties to
P. In exchange, P assumes the $10 of liabilities, and transfers to T
$30 of P voting stock and $10 of cash. T distributes the P voting
stock and $10 of cash to X and liquidates. The transaction satisfies
the solely for voting stock requirement of paragraph (d)(2)(ii) of
this section because the sum of $10 of cash paid to X and the
assumption by P.of $10 of liabilities does not exceed 20% of the
value of the properties of T.

Example 2. The facts are the same as in Example 1 except that P
purchased the 60 shares of T for $60 in cash in connection with the
acquisition of T's assets. The transaction does not satisfy the
solely for voting stock requirement of paragraph (d)(2)(ii) of this
section because P is treated as having acquired all of the T assets
for consideration consisting of $70 of cash, $10 of liability
assumption and $30 of P voting stock, and the sum of $70 of cash and
the assumption by P of $10 of liabilities exceeds 20% of the value
of the properties of T.

(iii) This paragraph (d)(4) applies to transactions occurring after
December 31, 1999, unless the transaction occurs pursuant to a
written agreement that is (subject to customary conditions) binding
on that date and at all times thereafter.

* * * * *

David A. Mader
Acting Deputy Commissioner of Internal Revenue
Approved: May 9, 2000
Jonathan Talisman
Deputy Assistant Secretary of the Treasury

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