This document contains amendments to 26 CFR Part 1 under section 1031(a) relating to the exchange of items of personal property that are within the same product class. Section 1031(a)(1) generally provides that no gain or loss shall be recognized on the exchange of property held for productive use in a trade or business or for investment if the property is exchanged solely for property of like kind to be held either for productive use in a trade or business or for investment. Thus, for a transaction to qualify as an exchange under section 1031, the transaction must constitute an exchange, the property relinquished and the property received in the exchange must be held for use in a trade or business or for investment, and the exchanged properties must be of like kind.

Section 1.1031(a)-2(a) provides that personal properties of a like class are to be considered of like kind for purposes of section 1031. Under §1.1031(a)-2(b), depreciable tangible personal property is of a like class to other depreciable tangible personal property if the exchanged properties are either within the same general asset class or within the same product class. The general asset classes are derived from Rev. Proc. 87-56, 1987-2 C.B. 674, (dealing with depreciation of personal property). Section 1.1031(a)-2(b)(2) adopts certain of those general asset classes to determine what property is of like kind for purposes of exchanging depreciable tangible personal property under section 1031, and identifies the types of personal property included in each general asset class listed.

Section 1.1031(a)-2(b)(3) provides, in part, that property within a product class consists of depreciable tangible personal property that is listed in a 4-digit product class (or “code”) within Division D (pertaining to the manufacturing sector of the economy) of Executive Office of the President, Office of Management and Budget, Standard Industrial Classification Manual (1987) (SIC Manual). Section 1.1031(a)-2(b)(4) states that the SIC Manual generally is modified every 5 years and that the product classes for section 1031 purposes will follow the modifications of product classes in the SIC Manual.

Effective January 1, 1997, the Department of Commerce discontinued the SIC system set forth in the SIC Manual and adopted NAICS as set forth in Executive Office of the President, Office of Management and Budget, North American Industry Classification System, United States, 1997 (NAICS Manual). The NAICS Manual was updated in 2002. Copies of the NAICS Manual may be obtained from the National Technical Information Service of the Department of Commerce and may be accessed, with a more complete listing of manufactured products and manufacturing industries, on the internet at http://www.census.gov/naics.

As a result of the replacement of the SIC system with NAICS, these temporary regulations discontinue the use of SIC codes and adopt Sectors 31 through 33 of NAICS (pertaining to manufacturing) as the system for defining the product classes for purposes of like-kind exchanges of depreciable tangible personal property. Within NAICS, product classes are designated using 6-digit codes rather than the 4-digit codes assigned to product classes under the SIC system. However, properties within the same product class under the 4-digit SIC system generally will be of the same product class under the 6-digit NAICS. For example, under the SIC codes, dairy equipment and haying machinery are within the same product class (SIC code 3523). Under NAICS, milking machines and haying machines are also within the same product class (NAICS code 333111).

The temporary regulations generally incorporate the provisions of §1.1031(a)-2(b)(3) relating to the use of product classes but substitute NAICS codes for SIC codes. For example, §1.1031(a)-2(b)(3) provides that, under the 4-digit SIC system, any 4-digit product class ending in 9 (a miscellaneous category) is not property within a product class. Similarly, the temporary regulations provide that any NAICS 6-digit product class ending in 9 is not property within a product class. Accordingly, such property, and property that is not listed in a 6-digit product class, cannot be of a like class to other property based on the 6-digit NAICS Manual classification. Taxpayers, however, may still demonstrate that these properties are of a like kind.

Comments are specifically requested regarding the continued utility of SIC codes and any potential problems in adopting the 6-digit NAICS codes in lieu of the 4-digit SIC codes, including specific examples of how a product class is narrowed if the 6-digit NAICS code is used and whether this would be a disadvantage to any class of taxpayers.

The temporary regulations incorporate the provisions of §1.1031(a)-2(b)(4) that permit taxpayers, in structuring like-kind exchanges, to rely on modifications to the product classes resulting from revisions to the NAICS Manual. The temporary regulations omit the provisions of §1.1031(a)-2(b)(4) that permit taxpayers to rely on modifications to the general asset classes in Rev. Proc. 87-56 for purposes of structuring like-kind exchanges. Under section 6253 of the Technical and Miscellaneous Revenue Act of 1988 (Public Law 100-647, 102 Stat. 3342), the Commissioner may not modify the asset classes in Rev. Proc. 87-56 for depreciation purposes. However, the temporary regulations provide that the Commissioner may, through published guidance of general applicability, supplement, modify, clarify and update the rules for the classification of properties. Therefore, the Commissioner may determine through published guidance not to follow a general asset class or product class for purposes of identifying property of like class or may determine that other properties not listed within the same or in any product class or general asset class nevertheless are of a like class.

In general, the temporary regulations apply to transfers of property made by taxpayers on or after August 12, 2004. However, taxpayers may apply the temporary regulations to transfers of property made by taxpayers on or after January 1, 1997, in taxable years for which the period of limitation has not expired. The temporary regulations include a transition rule permitting taxpayers to treat properties within the same product classes under a 4-digit SIC code as properties of like class for transfers of property made by taxpayers on or before the date these temporary regulations are published as final regulations in the Federal Register. Comments are specifically requested on whether a longer transition period should be provided before the use of the SIC codes is discontinued.

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. Please refer to the cross-referenced notice of proposed rulemaking published elsewhere in this issue of the Bulletin for applicability of the Regulatory Flexibility Act (5 U.S.C. Chapter 6). Pursuant to section 7805(f) of the Code, these temporary regulations will be submitted to the Chief Counsel for Advocacy of the Small Business Administration for comment on their impact on small business.

Paragraph 1. The authority citation for part 1 continues to read in part as follows:

Authority: 26 U.S.C. 7805 * * *

Par. 2. In §1.1031(a)-2, paragraphs (b)(3) through (b)(6), paragraph (b)(7) Example 3 and Example 4, are revised and a sentence is added at the end of paragraph (d) to read as follows:

This document contains amendments to the Excise Tax Procedural Regulations (26 CFR part 40) and the Facilities and Services Excise Tax Regulations (26 CFR part 49). Section 4251 of the Internal Revenue Code (Code) imposes an excise tax on amounts paid for certain communications services. Sections 4261(a) and (b) impose excise taxes on amounts paid for taxable transportation of persons by air. Section 4261(e)(3) provides that any amount paid to an air carrier or related party for the right to provide mileage awards for (or other reductions in the cost of) any transportation of persons by air is treated for purposes of section 4261(a) as an amount paid for taxable transportation and is therefore subject to tax. Section 4261(c) imposes an excise tax on any amount paid for the air transportation of persons that begins or ends in the United States. Section 4271 imposes an excise tax on amounts paid for taxable transportation of property by air. These taxes collectively are referred to as collected excise taxes.

For each of the collected excise taxes, the person liable for the tax is the person making the payment on which tax is imposed (the taxpayer). Under section 4291, the person receiving the payment on which tax is imposed (the collector) generally must collect the tax from the person making the payment and pay it over to the government.

If the taxpayer refuses to pay the tax the collector is required, under §49.4291-1, to report this refusal to the IRS. The IRS will then assert the tax against the taxpayer. Current regulations do not specify the time within which the collector must report this refusal to the IRS.

Collectors are responsible for filing returns with respect to the collected excise taxes and for making deposits of tax as required by section 6302. Section 40.6302(c)-3 provides an alternative method for computing the amount of deposits of collected excise taxes. Under the alternative method, collectors may compute the amount of tax to be deposited on the basis of amounts considered as collected instead of on the basis of actual collections of tax. A person may use the alternative method with respect to a tax only if the person separately accounts for the tax. The separate account must reflect for each month all items of tax that are included in amounts billed or tickets sold to customers during the month and items of adjustment (including bad debts and errors) relating to the tax for prior months within the period of limitations for credits or refunds. When a collector using the alternative method determines that a taxpayer has refused to pay the tax, the collector adjusts the separate account to reflect that the tax was not collected. Current regulations do not specify the time for adjusting the separate account to reflect that refusal.

The temporary regulations provide that the collector must report the refusal to pay the tax to the IRS by the due date of the return on which the tax would have been reported but for the refusal to pay. In addition, the temporary regulations provide that, for a person using the alternative method, the separate account cannot be adjusted to reflect a refusal to pay tax for the month unless such refusal has been reported.

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. For applicability of the the Regulatory Flexibility Act, please refer 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 temporary regulations will be submitted to the Chief Counsel for Advocacy of the Small Business Administration for comment on their impact on small business.

Paragraph 1. The authority citation for part 40 is amended by adding an entry in numerical order to read, in part, as follows:

Authority: 26 U.S.C. 7805 * * *

Section 40.6302(c)-3T also issued under 26 U.S.C. 6302 * * *

Par. 2. Paragraph (b)(2)(ii) of §40.6302(c)-3 is amended by:

a. Removing the language “and” at the end of paragraph (b)(2)(ii)(A).

b. Redesignating paragraph (b)(2)(ii)(B) as paragraph (b)(2)(ii)(C) and removing the language “Items” and adding “Other items” in its place.

c. Adding new paragraph (b)(2)(ii)(B) to read as follows:

Par. 4. The authority citation for part 49 continues to read, in part, as follows:

Authority: 26 U.S.C. 7805 * * *

Par. 5. Section 49.4291-1 is amended by adding a sentence after the third sentence to read as follows:

Section 301.7701-3(a) provides that an eligible entity with two or more owners may elect to be classified as an association (and thus a corporation under §301.7701-2(b)(2)) or a partnership, and an eligible entity with a single owner may elect to be classified as an association or to be disregarded as an entity separate from its owner. Section 301.7701-3(b) provides that, unless the entity elects otherwise, a domestic eligible entity is a partnership if it has two or more owners or is disregarded as an entity separate from its owner if it has a single owner. Section 301.7701-3(c) describes the time and place for filing an entity classification election. Section 301.7701-3(c)(1)(i) provides that an eligible entity may elect to be classified as other than its default classification or to change its classification by filing Form 8832, “Entity Classification Election”, with the service center designated on the form.

A taxpayer whose default classification is a partnership or a disregarded entity may seek to be classified as an S corporation. In these cases, the taxpayer must elect to be classified as an association under §301.7701-3(c)(1)(i) by filing Form 8832 and must elect to be an S corporation under section 1362(a) by filing Form 2553, “Election by a Small Business Corporation.” In some cases, an entity may timely file the Form 2553 but fail to file the Form 8832. The entity must then submit a letter ruling request for an extension of time under §301.9100 to file a late entity classification election. The temporary regulation provides relief for these entities. In other cases, the Form 2553 and the Form 8832 are filed late, and the entity must submit a ruling request under §301.9100 to file a late entity classification election and under section 1362(b)(5) to file a late S corporation election. Rev. Proc. 2004-48, 2004-32 I.R.B. 172, provides relief for these entities.

Requiring eligible entities to file two elections in order to be classified as S corporations creates a burden on those entities and on the Internal Revenue Service (IRS). The temporary regulation simplifies these paperwork requirements by eliminating, in certain cases, the requirement that the entity elect to be classified as an association. Instead, an eligible entity that makes a timely and valid election to be classified as an S corporation will be deemed to have elected to be classified as an association taxable as a corporation.

The temporary regulation amends §301.7701-3(c)(1)(v) to provide that, if an eligible entity makes a timely and valid election to be an S corporation under section 1362(a)(1), it is treated as having made an election to be classified as an association under §301.7701-3. However, if the eligible entity’s election is not timely and valid, the default classification rules provided in §301.7701-3(b) will apply to the entity unless the Service provides late S corporation election relief or inadvertent invalid election relief. If the late or invalid election is not perfected, the default rules will maintain the passthrough taxation treatment by classifying the entity as a partnership or a disregarded entity.

The regulations apply to elections to be an S corporation filed on or after July 20, 2004. However, eligible entities that timely filed S elections July 20, 2004, may also rely on the provisions of the regulation.

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. For the applicability of the Regulatory Flexibility Act (5 U.S.C. chapter 6), refer to the Special Analysis section of the preamble to the notice of proposed rulemaking on this subject published elsewhere in this issue of the Bulletin.

Paragraph 1. The authority citation for part 301 continues to read, in part, as follows:

Authority: 26 U.S.C. 7805 ***

Par. 2. Section 301.7701-3 is amended by adding paragraphs (c)(1)(v)(C) and (h)(3) to read as follows:

These proposed regulations relate to the obligations of persons that receive payments for air transportation or communications services subject to excise tax when persons liable for the tax refuse to pay the tax. These proposed regulations would amend the Excise Tax Procedural Regulations (26 CFR part 40) and the Facilities and Services Excise Tax Regulations (26 CFR part 49). The text of temporary regulations published in this issue of the Bulletin also serves as the text of these proposed regulations. The preamble to the temporary regulations explains the temporary regulations.

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 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 the notice of proposed rulemaking does not impose a collection of information on small entities, the provisions of the Regulatory Flexibility Act (5 U.S.C. chapter 6) do 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 business.

Before these proposed regulations are adopted as final regulations, consideration will be given to any written comments (a signed original and eight (8) copies) or electronic comments that are submitted timely to the IRS. The IRS and Treasury Department specifically request comments on the clarity of the proposed regulations and how they may be made easier to understand. All comments will be available for public inspection and copying. A public hearing may 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 hearing will be published in the Federal Register.

Paragraph 1. The authority citation for part 40 continues to read, in part, as follows:

Authority: 26 U.S.C. 7805 * * *

Par. 2. Section 40.6302(c)-3 is amended by revising paragraph (b)(2)(ii)(B) to read as follows:

Par. 3. The authority citation for part 49 continues to read in part as follows:

Authority: 26 U.S.C. 7805 * * *

Par. 4. Section 49.4291-1 is amended by revising the fourth sentence to read as follows:

Temporary regulations published elsewhere in this issue of the Bulletin amend §301.7701-3T(c)(1)(v)(C) to provide that certain eligible entities that file timely S corporation elections are deemed to have elected to be classified as associations taxable as corporations. The text of the temporary regulations also serves as the text of these proposed regulations. The preamble to the temporary regulations explains the temporary regulations.

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 is hereby certified that the collection of information in these regulations will not have a significant economic impact on a substantial number of small entities. This certification is based upon the fact that the purpose of the regulation is to decrease the number of entities required to file an entity classification election, Form 8832. Therefore, a Regulatory Flexibility Analysis under the Regulatory Flexibility Act (5 U.S.C. chapter 6) is not required. Pursuant to section 7805(f) of the Internal Revenue Code, this notice of proposed regulation will be submitted to the Chief Counsel for Advocacy of the Small Business Administration for comment on its impact on small business.

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 IRS. 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 of the public hearing will be published in the Federal Register.

Paragraph 1. The authority citation for part 301 continues to read, in part, as follows:

Authority: 26 U.S.C. 7805 * * *

Para. 2. Section 301.7701-3 is amended by adding paragraphs (c)(1)(v)(C) and (h)(3) to read as follows:

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) §1001; §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 §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:

Berghash v. Commissioner, 43 T.C. 743, 752 (1965) (citation and footnotes omitted), aff’d, 361 F.2d 257 (2^nd 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 §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. §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 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 §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 (4^th 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 (5^th 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) 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., §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 these regulations are published as final regulations in the Federal Register.

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.

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.

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.

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:

Temporary regulations in this issue of the Bulletin amend 26 CFR Part 1 relating to section 1031(a)(1).The temporary regulations substitute NAICS classification codes for the SIC classification codes in the regulatory text and permit the use of NAICS codes for determining product classes, and therefore property of like kind, of depreciable tangible personal property exchanged under section 1031. The text of those temporary regulations also serves as the text of these proposed regulations. The preamble to the temporary regulations explains the amendments.

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 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 the 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.

Before these proposed regulations are adopted as final regulations, consideration will be given to any written comments (a signed original and eight (8) copies) or electronic comments that are submitted timely to the IRS. The IRS and Treasury Department request comments on the clarity of these proposed regulations and how they may 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.

Paragraph 1. The authority for part 1 continues to read, in part, as follows:

Authority: 26 U.S.C. 7805 * * *

Par. 2. In §1.1031(a)-2, paragraphs (b)(3) through (b)(6), and Example 3 and Example 4 of paragraph (b)(7) are revised to read as follows:

This document contains proposed amendments to the Income Tax Regulations (26 CFR part 1) under section 1502 of the Internal Revenue Code. On July 18, 1995, final regulations (T.D. 8597, 1995-2 C.B. 147) under §1.1502-13, amending the intercompany transaction system of the consolidated return regulations, were published in the Federal Register (60 FR 36671). Those final regulations provide rules for taking into account items of income, gain, deduction, and loss of members from intercompany transactions. Their purpose is to clearly reflect the taxable income (and tax liability) of the group by preventing intercompany transactions from creating, accelerating, avoiding, or deferring consolidated taxable income or consolidated tax liability.

The regulations are proposed to apply to any consolidated return year for which the due date of the income tax return (without regard to extensions) is on or after the date that is sixty days after the date these regulations are filed as final regulations with the Federal Register.

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 is hereby certified that these regulations will not have a significant economic impact on a substantial number of small entities. This certification is based upon the fact that these regulations will primarily affect affiliated groups of corporations that have elected to file consolidated returns, which tend to be larger businesses. Therefore, a Regulatory Flexibility Analysis under the Regulatory Flexibility Act (5 U.S.C. chapter 6) is not required. Pursuant to section 7805(f) of the Internal Revenue Code, this notice of proposed rule making will be submitted to the Chief Counsel for Advocacy of the Small Business Administration for comment on their impact on small business.

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 IRS. 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 or electronic 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.

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 * * *

Section 1.1502-13 also issued under 26 U.S.C. 1502. * * *

Par. 2. Section 1.1502-13 is amended by adding paragraph (c)(7)(ii), Example 13(c), (d), and (e), and paragraph (c)(7)(iii) to read as follows:

The proposed regulations that are the subject of these corrections are under section 1045 of the Internal Revenue Code.

As published, the notice of proposed rulemaking contains errors that may prove to be misleading and are in need of clarification.

Accordingly, the publication of the notice of proposed rulemaking (REG-150562-03), which was the subject of FR Doc. 04-15964, is corrected as follows:

1. On page 42371, column 1, in the preamble, under the subject heading “Background”, line 3, the language “the sale of QSB stock held by non-” is corrected to read “the sale of qualified small business (QSB) stock (as defined in section 1202(c)) held by non-”.

2. On page 42371, column 1, in the preamble, under the subject heading “Background” lines 8 thru 10 are corrected to read “percent of gain on the sale of QSB stock from gross income if”.

3. On page 42372, column 1, in the preamble, under the subject heading “Explanation of Provisions” paragraph 2, line 7, the language “though approach to the sale and” is corrected to read “through approach to the sale and”.

4. On page 42377, column 1, §1.1045-1, paragraph (g), Example 2, line 5, the language “PRS interest for $50x, realizing $25 of capital” is corrected to read “PRS interest for $50, realizing $25 of capital”.