notice

Part III. Administrative, Procedural, and Miscellaneous
Qualified NMWHFIT Exception
Extension
Notice 2006–30
PURPOSE
This notice informs taxpayers that
§ 1.671–5, which provides reporting
rules for widely held fixed investment
trusts (WHFITs), will be amended to
provide that the availability of the Qualified NMWHFIT (non-mortgage widely
held fixed investment trust) Exception in
§ 1.671–5(c)(2)(iv)(E) is extended by 60
days from the date indicated in Notice
2006–29, 2006–12 I.R.B. 644, issued by
the IRS and the Treasury Department on
February 23, 2006.
BACKGROUND
On January 24, 2006, the IRS and
Treasury Department published final regulations under § 1.671–5 (Reporting Requirements for Widely Held Fixed Investment Trusts) in the Federal Register (T.D.
9241, 2006–7 I.R.B. 427 [71 FR 4002]).
Following the publication of those final
regulations, the IRS and Treasury Department received a number of comments
regarding the applicability of those regulations to NMWHFITs. The commentators
requested that the IRS and the Treasury
Department issue additional guidance to
clarify and simplify the application of the
final regulations to NMWHFITs. Commentators also requested that the availability of the qualified NMWHFIT exception
in § 1.671–5(c)(2)(iv)(E) be extended
while the additional guidance was being
developed. The qualified NMWHFIT
exception, if satisfied, excepts trustees
and middlemen from specific reporting
requirements in the final regulations regarding market discount, bond premium,
sales and dispositions, redemptions, and
sales of trust interests. In response, the
IRS and Treasury Department issued Notice 2006–29 which, among other things,
indicated that the IRS and Treasury Department intended to amend §1.671–5
to extend the availability of the qualified
NMWHFIT exception to NMWHFITs created on or after February 23, 2006 which
was the cut-off date for qualifying for the

2006–24 I.R.B.

exception in the final regulations. Under
Notice 2006–29, to satisfy the qualified
NMWHFIT exception, a NMWHFIT’s
registration statement must become effective under the Securities Act of 1933, as
amended (15 U.S.C. 77a, et. seq.) (Securities Act of 1933) and trust interests must
be offered for sale to the public by June
1, 2006 and the NMWHFIT must be fully
funded by August 1, 2006.
60 DAY EXTENSION
The IRS and the Treasury Department
expect to issue additional guidance under § 1.671–5 in the near future that will
include minor modifications to the reporting rules for sales and dispositions
in § 1.671–5. Such guidance, however,
will not be issued prior to June 1, 2006.
Accordingly, the IRS and the Treasury
Department are extending the availability of the qualified NMWHFIT exception beyond the date in Notice 2006–29.
Specifically, taking into account the extensions indicated in Notice 2006–29 and
the extension indicated in this notice,
§ 1.671–5(c)(2)(iv)(E) will be amended
to provide that the qualified NMWHFIT
exception is satisfied if the calendar year
for which the trustee is reporting begins before January 1, 2011 and: (1) the
NMWHFIT has a start-up date (as defined
in § 1.671–5(b)(19)) before February 23,
2006; (2) the registration statement of the
NMWHFIT becomes effective under the
Securities Act of 1933 and trust interests
are offered for sale to the public before
February 23, 2006; or (3) the registration
statement of the NMWHFIT becomes effective under the Securities Act of 1933
and trust interests are offered for sale to the
public on or after February 23, 2006 and
before July 31, 2006, and the NMWHFIT
is fully funded before October 1, 2006.
EFFECTIVE DATE
The effective date for amended
§ 1.671–5(c)(2)(iv)(E) will be the date
of publication of those amendments in the
Federal Register. Taxpayers, however,
may apply those amendments as though
they were included in § 1.671–5 as published in the Federal Register on January
24, 2006.

1044

DRAFTING INFORMATION
The principal author of this notice is
Faith P. Colson of the Office of Associate
Chief Counsel (Passthroughs & Special Industries). For further information regarding this notice, contact Faith P. Colson at
(202) 622–3060 (not a toll-free call).

Announcement of Rules to be
Included in Final Regulations
Under Sections 897(d) and (e)
of the Code
Notice 2006–46
PURPOSE
This notice announces that the Internal
Revenue Service (IRS) and the Treasury
Department (Treasury) will issue final
regulations under sections 897(d) and
(e) of the Internal Revenue Code (Code)
that set forth and, to the extent described
in this notice, revise, the current rules
under sections 1.897–5T and 1.897–6T
of the temporary income tax regulations
and Notice 89–85, 1989–2 C.B. 403, regarding certain transactions involving the
transfer of U.S. real property interests
(USRPIs), as defined in section 897(c)(1)
of the Code. When issued, the regulations
will revise the rules of Notice 89–85 and
Temp. Treas. Reg. § 1.897–5T(c)(4)
relating to inbound asset reorganizations
described in section 368(a)(1)(C), (D), or
(F) to take into account statutory mergers
and consolidations described in section
368(a)(1)(A). The final regulations will
also revise the rules of Temp. Treas.
Reg. § 1.897–6T(b)(1) to take into account foreign-to-foreign statutory mergers
and consolidations described in section
368(a)(1)(A) and to create two additional
exceptions that provide a foreign corporation with nonrecognition treatment
on its transfer of a USRPI in certain
foreign-to-foreign asset reorganizations.
Moreover, the final regulations will incorporate a revised version of Temp. Treas.
Reg. § 1.897–6T(b)(1)(iii). The final regulations will eliminate all the conditions
required for nonrecognition treatment in
Temp. Treas. Reg. § 1.897–6T(b)(2).

June 12, 2006

Finally, the final regulations will modify
the period that must be considered for
imposing taxes and accrued interest on
prior dispositions of the stock of foreign
corporations under Temp. Treas. Reg.
§ 1.897–5T(c)(2), (4), and Treas. Reg.
§1.897–3(c)(5), (d).
The portion of the final regulations that
will address distributions, transfers, or exchanges occurring in the context of a statutory merger or consolidation described in
section 368(a)(1)(A) will generally apply
to distributions, transfers, or exchanges occurring on or after January 23, 2006. Final regulations regarding the revisions to
Temp. Treas. Reg. §1.897–5T(c)(2),
(4), Treas. Reg. §1.897–3(c)(5), (d), and
Temp. Treas. Reg. § 1.897–6T(b), except as such regulations are applicable to
exchanges in section 368(a)(1)(A) reorganizations, will apply to distributions, transfers, or exchanges occurring on or after
May 23, 2006. However, taxpayers may
choose to apply these regulatory changes
to all dispositions, transfers, or exchanges
occurring before May 23, 2006, during any
taxable year that is not closed by the period
of limitations, provided they do so consistently with respect to all such dispositions,
transfers, and exchanges.
BACKGROUND
Under section 897(a), the disposition of
a USRPI by a nonresident alien individual or a foreign corporation is taxable as
effectively connected income under section 871(b)(1) or section 882(a)(1), respectively, as if the taxpayer were engaged in a
trade or business within the United States
during the taxable year and the gain or loss
were effectively connected with the trade
or business.
Section 897(c)(1) generally defines a
USRPI to include any interest (other than
an interest solely as a creditor) in any
domestic corporation, unless the taxpayer
establishes that such corporation was not
a U.S. real property holding corporation
(USRPHC) at any time during the shorter
of the period the taxpayer held such interest or the 5-year period ending on the date
of the disposition of such interest. Under
section 897(c)(2), a USRPHC is defined as
any corporation if the fair market value of
its USRPIs equals or exceeds 50-percent
of the sum of the fair market value of (i)
its USRPIs, (ii) its real property interests

June 12, 2006

located outside of the United States, and
(iii) any of its other assets used or held for
use in a trade or business.
Under section 897(d)(1), except to the
extent provided in regulations, gain is recognized by a foreign corporation on the
distribution (including a distribution in liquidation or redemption) of a USRPI in
a transaction that otherwise qualifies for
nonrecognition under the Code. Section
897(d)(2) provides that gain is not recognized under section 897(d)(1) if either: (i)
at the time of the receipt of the distributed
property, the distributee would be subject
to taxation on a subsequent disposition of
the distributed property, and the basis of
the distributed property in the hands of the
distributee is not greater than the adjusted
basis of such property before the distribution, increased by the amount of gain
(if any) recognized by the distributing corporation; or (ii) nonrecognition treatment
is provided for in regulations prescribed
by the Secretary under section 897(e)(2).
Temp. Treas. Reg. § 1.897–5T provides
rules, exceptions, and limitations regarding section 897(d) distributions in the context of sections 332, 355, and 361. See
Temp. Treas. Reg. § 1.897–5T(c)(2), (3),
and (4). Notice 89–85 announced rules
that would revise the application of certain
of the exceptions set forth in the temporary
regulations. As relevant to the changes
announced in this notice, the provisions
of those regulations and Notice 89–85 are
discussed below.
Subject to the rules of section 897(d)
and any regulations issued under section
897(e)(2), section 897(e)(1) provides that
any nonrecognition provision will apply
only in the case of an exchange of a USRPI
for an interest the sale of which would be
taxable under Chapter 1 of the Code. Under section 897(e)(2), Treasury has authority to prescribe regulations providing the
extent to which nonrecognition provisions
shall apply to transfers of USRPIs.
Pursuant to section 897(e)(2), Temp.
Treas. Reg. § 1.897–6T(a)(1) states the
general rule of section 897(e) and imposes
certain requirements for nonrecognition.
Among other things, that regulation provides that except as otherwise provided
in Temp. Treas. Reg. §§ 1.897–5T and
–6T, any nonrecognition provision applies to a transfer by a foreign person of
a USRPI on which gain is realized only
to the extent that the transferred USRPI

1045

is exchanged for a USRPI which, immediately following the exchange, would be
subject to U.S. taxation upon its disposition, and the transferor complies with
the filing requirements of Temp. Treas.
Reg. § 1.897–5T(d)(1)(iii). Temp. Treas.
Reg. § 1.897–6T(b) provides exceptions to this rule for certain exchanges in
foreign-to-foreign nonrecognition transactions. The exceptions described in Temp.
Treas. Reg. § 1.897–6T(b) are discussed
below in the context of the changes announced by this notice to such provisions.
The IRS and Treasury issued final
regulations on January 23, 2006, concerning statutory mergers and consolidations
described in section 368(a)(1)(A). See
T.D. 9242, 2006–7 I.R.B. 422 (February 13, 2006). Treasury Decision 9242
provides a revised definition of the term
“statutory merger or consolidation” that
permits transactions effected pursuant to
the statutes of a foreign jurisdiction or of
a United States possession to qualify as a
statutory merger or consolidation. Further,
that regulation generally applies to transactions occurring on or after January 23,
2006. Prior to the issuance of T.D. 9242,
temporary regulations defined a statutory
merger or consolidation as including only
transactions effected pursuant to the laws
of the United States or a State or the District of Columbia.
DISCUSSION
The IRS and Treasury have determined that the rules of Notice 89–85 and
Temp. Treas. Reg. §§ 1.897–5T(c) and
1.897–6T(b) should be revised to reflect
the recently issued regulations under section 368(a)(1)(A). This action is necessary
because Notice 89–85 and the temporary
regulations did not contemplate statutory
mergers or consolidations under foreign
or possessions law as qualifying under
section 368(a)(1)(A). In addition, the IRS
and Treasury believe that certain other
changes to the scope of the rules under
Treas. Reg. § 1.897–3 and Temp. Treas.
Reg. §§ 1.897–5T and –6T are appropriate. Accordingly, this notice announces
that the IRS and Treasury will issue final
regulations under sections 897(d), (e), and
(i) that generally incorporate the rules of
Treas. Reg. § 1.897–3 and Temp. Treas.
Reg. §§ 1.897–5T and –6T, and Notice
89–85, except as described below.

2006–24 I.R.B.

1. Revision to the rules of Temp. Treas.
Reg. § 1.897–5T(c)(4) relating to inbound
asset reorganizations
Temp. Treas. Reg. § 1.897–5T(c)(4)
applies the rules of section 897(d) to certain distributions of stock of a USRPHC
by a foreign corporation under section
361(c). Under the temporary regulations,
a foreign corporation that transfers property to a domestic corporation (that is a
USRPHC immediately after the transfer)
in an exchange under section 361(a) or (b)
pursuant to a reorganization under section
368(a)(1)(C), (D), or (F) must recognize
gain under section 897(d)(1) and Temp.
Treas. Reg. § 1.897–5T(c)(4)(i) when it
distributes the stock of the USRPHC to its
shareholders under section 361(c). Temp.
Treas. Reg. § 1.897–5T(c)(4)(ii) and (iii)
provide an exception and a limitation to
this gain recognition.
In Notice 89–85, the IRS and Treasury announced that the exception and the
limitation set forth in Temp. Treas. Reg.
§ 1.897–5T(c)(4)(ii) and (iii) would be
replaced by a new exception. The new
exception announced in Notice 89–85
provides that recognition of gain will
not be required on the distribution under section 361(c)(1) of the stock of the
USRPHC under Temp. Treas. Reg.
§ 1.897–5T(c)(4)(i) if the foreign corporation pays an amount equal to any
taxes that section 897 would have imposed upon all persons who had disposed
of interests in the transferor foreign corporation (or a corporation from which
such assets were acquired in a transaction
described in section 381) after June 18,
1980, as if it were a domestic corporation
on the date of each such disposition, and
if the conditions of Temp. Treas. Reg.
§ 1.897–5T(c)(4)(ii)(A) and (C) (relating
to the distributee being subject to tax on a
subsequent disposition and certain filing
requirements) are met. Other requirements
relating to the time and manner of payment of tax and interest are also set forth
in the notice. The revisions announced in
Notice 89–85 generally apply to all distributions of stock under Temp. Treas. Reg.
§ 1.897–5T(c)(4) occurring after July 31,
1989.
The IRS and Treasury have determined
that when final regulations are issued,
inbound statutory mergers and consolidations described in section 368(a)(1)(A)

2006–24 I.R.B.

(including such reorganizations by reason
of 368(a)(2)(D) or (E)) will be subject to
the same rules set forth in Temp. Treas.
Reg. § 1.897–5T(c)(4) and Notice 89–85
that apply to other inbound asset reorganizations. Further, as described in part 2,
below, the period that a foreign corporation must consider with respect to prior
stock dispositions under Temp. Treas.
Reg. § 1.897–5T(c)(4) will be revised.
2. Revisions to the Notice 89–95
stock disposition look-back period
applicable to Temp. Treas. Reg.
§ 1.897–5T(c)(2)(ii) liquidations, Temp.
Treas. Reg. § 1.897–5T(c)(4) inbound
asset reorganizations, and section 897(i)
elections.
Section 1.897–5T(c)(2) of the temporary regulations applies the rules of
section 897(d) to liquidating distributions
of USRPIs by a foreign corporation to
a domestic corporation pursuant to section 332(a). Under Temp. Treas. Reg.
§ 1.897–5T(c)(1), a foreign corporation
that makes a liquidating distribution of
a USRPI to a foreign or domestic shareholder must recognize gain on the distribution under section 897(d), unless
the distribution comes within an exception described in Temp. Treas. Reg.
§ 1.897–5T(c)(2), (3), or (4). Temp.
Treas. Reg. § 1.897–5T(c)(2)(i) and (ii)
provide exceptions to this recognition rule
that are applicable to liquidating distributions under section 332(a).
In Notice 89–85, the IRS and Treasury
announced that the exceptions set forth in
Temp. Treas. Reg. § 1.897–5T(c)(2)(i)
and (ii) would be replaced by a new exception. The new exception announced in
Notice 89–85 provides that recognition of
gain shall not be required on the liquidating distribution of a USRPI by a foreign
corporation to a domestic corporation
meeting the stock ownership requirements of section 332(b) in a section 332(a)
liquidation if the distributing foreign corporation pays the tax and interest on any
prior disposition of its stock (or stock
of a corporation from which such assets
were acquired in a transaction described
in section 381) after June 18, 1980, as if
it were a domestic corporation on the date
of such dispositions, and if the conditions
of Temp. Treas. Reg. § 1.897–5T(c)(2)(i)
are met (relating to the distributee being

1046

subject to tax on a subsequent disposition
and certain basis carryover and filing requirements). The revisions announced in
Notice 89–85 generally apply to all distributions of stock under Temp. Treas. Reg.
§ 1.897–5T(c)(2) occurring after July 31,
1989. Similarly, as described in part 1 of
this notice, above, Notice 89–85 revised
the look-back period applicable to inbound
reorganizations under Temp. Treas. Reg.
§ 1.897–5T(c)(4) to encompass certain
dispositions of the stock of the foreign
corporation that occur after June 18, 1980.
The rules of Notice 89–85 also require the
payment of interest, as determined under
section 6621, that would have accrued had
tax actually been due with respect to the
prior stock dispositions.
Further, section 897(i), which permits a
foreign corporation to elect to be treated as
a domestic corporation for purposes of section 897, requires as a condition to making
the election that the electing foreign corporation verify that no interest in the corporation was disposed of during the shorter
of: (1) the period from June 19, 1980
through the date of the election, (2) the period from the date on which the corporation first holds a USPRI through the date
of the election, or (3) the five year period
ending on the date of the election. See
Treas. Reg. § 1.897–3(c)(5). If the foreign
corporation cannot make such verification,
then it must comply with the conditions of
Treas. Reg. § 1.897–3(d) which, among
other things, requires the payment of an
amount equal to any taxes that section 897
would have imposed on all persons who
had disposed of interests in the corporation
during such period. The payment must
also include any interest, as determined under section 6621, that would have accrued
had the tax actually been due with respect
to the dispositions. These rules were modified by Notice 89–85 to require the reporting and payment of tax and accrued interest on all dispositions of stock occurring
after June 18, 1980 that would have been
subject to taxation under section 897(a).
The IRS and Treasury have determined
that when final regulations are issued, the
look-back, tax, and interest payment periods applicable under Notice 89–85 to
Temp. Treas. Reg. § 1.897–5T(c)(2) liquidating distributions, Temp. Treas. Reg.
§ 1.897–5T(c)(4) inbound asset reorganizations, and section 897(i) elections will be
modified as described below.

June 12, 2006

Regarding distributions of USRPIs by a
foreign corporation to a domestic corporation in a section 332 liquidation, the final
regulations will amend the rules of Temp.
Treas. Reg. § 1.897–5T(c)(2)(ii) and Notice 89–85 to provide that recognition of
gain will not be required on the distribution of any USRPI by the distributing foreign corporation to the domestic corporation if the distributing foreign corporation
pays an amount equal to the tax and interest that would have been imposed upon
all persons who disposed of an interest in
the foreign corporation (or a corporation
from which such assets were acquired in a
transaction described in section 381) during the period beginning on the date that
is 10 years prior to the date on which the
domestic corporation or any related person (within the meaning of section 267(b))
is in control (as determined under section
304(c)) of the liquidating foreign corporation, and ending on the date of the liquidation, as if the foreign corporation were a
domestic corporation on the date of each
such disposition and if the conditions of
Temp. Treas. Reg. § 1.897–5T(c)(2)(i)
are met.
Regarding inbound asset acquisitions described in Temp.
Treas.
Reg. § 1.897–5T(c)(4) as modified by
this notice, the final regulations will
amend the rules of Temp. Treas. Reg.
§ 1.897–5T(c)(4)(ii) and Notice 89–85 to
provide that recognition of gain will not
be required on the distribution of stock
of a USRPHC if the foreign corporation
pays an amount equal to any taxes and
interest that would have been imposed
upon all persons who disposed of an interest in the foreign corporation (or a
corporation from which the assets were
acquired in a transaction described in section 381) during the applicable period as
if the foreign corporation were a domestic corporation on the date of each such
disposition, and the conditions of Temp.
Treas. § 1.897–5T(c)(4)(ii)(A) and (C)
are met. The applicable period means the
earliest of either:

•

The period beginning on the date that
is 10 years prior to the date on which
the acquiring domestic corporation or
a related person (within the meaning
of section 267(b)) is in control (as determined under section 304(c)) of the
foreign corporation and ending on the

June 12, 2006

date of the reorganization. For purposes of the preceding sentence, the
acquiring domestic corporation means
the domestic corporation that is the
transferee in the 361(a) exchange; or

•

The period beginning on the date that
is 10 years prior to the date of the reorganization and ending on the date of
the reorganization.

Regarding the revisions to Treas. Reg.
§1.897–3(c)(5), and (d) pertaining to a foreign corporation’s election under section
897(i), the final regulations will provide
that the applicable period will be the earliest of either:

•

The period beginning on the date that
is 10 years prior to the date on which
one or more domestic shareholders or
related persons (within the meaning of
section 267(b)) are in control (as determined under section 304(c)) of the
foreign corporation and ending on the
date of the election; or

•

The period beginning on the date that is
10 years prior to the date of the section
897(i) election and ending on the date
of the election.

3. Revisions to the rules of Temp. Treas.
Reg. § 1.897–6T
(a) Revision to the rules of Temp. Treas.
Reg. § 1.897–6T(b)(1)(ii) to take into account statutory mergers and consolidations described in section 368(a)(1)(A)
As noted above, Temp. Treas. Reg.
§ 1.897–6T(a)(1) generally provides that
any nonrecognition provision shall apply to a transfer by a foreign person of a
USRPI only to the extent that the foreign
person receives a USRPI in such exchange. Pursuant to the regulatory authority under section 897(e)(2) of the Code,
Temp. Treas. Reg. § 1.897–6T(b)(1)
and (2) provide exceptions to the rule of
Temp. Treas. Reg. § 1.897–6T(a)(1)
for certain foreign-to-foreign reorganizations and certain exchanges under section
351 where a foreign person transfers a
USRPI for stock in a foreign corporation. These exceptions require that (1)
the transferee’s subsequent disposition of
the transferred USRPI be subject to U.S.
income taxation in accordance with Temp.
Treas. Reg. § 1.897–5T(d)(1); (2) the

1047

filing requirements of Temp. Treas. Reg.
§ 1.897–5T(d)(1)(iii) be satisfied; (3) one
of the five conditions set forth in paragraph (b)(2) exists; and (4) the exchange
takes one of the three forms of exchange
described in paragraph (b)(1).
Temp. Treas. Reg. § 1.897–6T(b)
(1)(ii) describes one of the three permissible forms of exchange referenced above.
That paragraph describes an exchange by
a foreign corporation pursuant to section
361(a) or (b) in a reorganization described
in section 368(a)(1)(C), where there is
an exchange of the transferor corporation
stock for the transferee corporation stock
(or stock of the transferee corporation’s
parent in the case of a parenthetical C reorganization) under section 354(a), and the
transferor corporation’s shareholders own
more than fifty percent of the voting stock
of the transferee corporation (or stock of
the transferee corporation’s parent in the
case of a parenthetical C reorganization)
immediately after the reorganization. The
fifty percent limitation restricts this exception to reorganizations described in section
368(a)(1)(C) that are restructurings where
the transferor corporation shareholders
control the transferee corporation after the
transaction (e.g., internal restructurings).
The IRS and Treasury have determined that when final regulations are
issued, foreign-to-foreign statutory mergers and consolidations described in section
368(a)(1)(A) (including such reorganizations by reason of section 368(a)(2)(D)
or (E)) will be subject to the same
rules set forth in Temp. Treas. Reg.
§ 1.897–6T(b)(1)(ii) that apply to foreign-to-foreign reorganizations described
in section 368(a)(1)(C) (including parenthetical C reorganizations). The exception
for statutory mergers and consolidations
described in section 368(a)(1)(A) will
be limited to restructurings where the
50 percent control requirement is satisfied after the transaction. Further, the
final regulations will provide that in determining whether the fifty percent requirement set forth in Temp. Treas. Reg.
§ 1.897–6T(b)(1)(ii) is met where the
transferee corporation owns more than
fifty percent of the transferor corporation before a reorganization under section
368(a)(1)(A) or 368(a)(1)(C) (i.e., an
upstream reorganization), the shareholders of the transferee corporation before
the reorganization (that continue to be

2006–24 I.R.B.

shareholders of the transferee corporation
after the reorganization) will be treated as
shareholders of the transferor corporation
before the reorganization to the extent
of their indirect interest in the stock of
the transferor corporation (owned by the
transferee corporation) before the reorganization.
Accordingly, when issued, the final regulations will provide that gain shall not
be recognized where an exchange is made
by a foreign corporation pursuant to section 361(a) or (b) in a reorganization described in section 368(a)(1)(A) (including
such reorganization by reason of section
368(a)(2)(D) or (E)); there is an exchange
of the transferor corporation stock for the
transferee corporation stock (or the stock
of the transferee corporation’s parent in the
case of a reorganization by reason of section 368(a)(2)(D)) under section 354(a);
immediately after the reorganization, the
transferor corporation’s shareholders own
more than fifty percent of the voting stock
of the transferee corporation (or the transferee corporation’s parent in a reorganization by reason of section 368(a)(2)(D)), or
in the case of a reorganization by reason of
section 368(a)(2)(E), the shareholders of
the corporation that controls the transferor
corporation before the reorganization own
more than fifty percent of the voting stock
of that controlling corporation after the reorganization; and the other requirements
of Temp. Treas. Reg. § 1.897–6T(b)(1)
are satisfied.
(b) Additional exceptions to be added
to the rules of Temp.
Treas.
Reg.
§ 1.897–6T(b)(1)
The IRS and Treasury have determined that when final regulations are
issued, the rules of Temp. Treas. Reg.
§ 1.897–6T(b)(1) will be expanded to include two additional exceptions. Those
exceptions will apply only in certain
foreign-to-foreign statutory mergers
and consolidations described in section
368(a)(1)(A) (including such reorganizations by reason of section 368(a)(2)(D)
or (E)) and foreign-to-foreign reorganizations described in section 368(a)(1)(C)
(including parenthetical C reorganizations). Accordingly, the new exceptions
to be incorporated in the final regulations will revise the rules of Temp. Treas.
Reg. § 1.897–6T(b)(1) to provide that
such foreign-to-foreign reorganizations
will be excepted from the general gain

2006–24 I.R.B.

recognition rule of Temp. Treas. Reg.
§ 1.897–6T(a)(1) provided that the other
requirements set forth in Temp. Treas.
Reg. § 1.897–6T(b)(1) are met. The
two additional exceptions apply where
an exchange is made by a foreign corporation pursuant to section 361(a) or (b)
in a reorganization described in section
368(a)(1)(A) (including a reorganization
by reason of section 368(a)(2)(D) or (E))
or section 368(a)(1)(C) (including parenthetical C reorganizations); there is an
exchange of the transferor corporation
stock for the transferee corporation stock
(or the transferee corporation’s parent in
the case of a reorganization by reason of
section 368(a)(2)(D) or a parenthetical C
reorganization) under section 354(a); and
either:

•

Stock in the transferor corporation
(including a predecessor corporation
in a transaction described in section
381(a)) would not be a USRPI at any
time within the five year period ending
on the date of the reorganization if the
transferor corporation were a domestic
corporation; or

•

Regarding reorganizations under section 368(a)(1)(A) (other than by reason of section 368(a)(2)(D) or (E)) or
section 368(a)(1)(C) (other than parenthetical reorganizations described
in that section): prior to the exchange
the stock of the transferor corporation and the stock of the transferee
corporation, and after the exchange
the stock of the transferee corporation are regularly traded under Treas.
Reg. § 1.897–1(n) and Temp. Treas.
Reg. § 1.897–9T(d)(1) and (2) on an
established securities market under
§ 1.897–1(m), and in the case where
the transferor corporation would have
been a USRPHC at any time within
the five year period ending on the
date of the reorganization if the transferor corporation had been a domestic
corporation, no foreign shareholder
of the transferor corporation owned
a more than five percent interest in
the transferor corporation at such
time under the rules of Treas. Reg.
§ 1.897–1(c)(2)(iii) and Temp. Treas.
Reg. § 1.897–9T.

1048

Regarding parenthetical C reorganizations and reorganizations under section 368(a)(1)(A) by reason of section
368(a)(2)(D): prior to the exchange the
stock of the transferor corporation and
the stock of the corporation in control
of the transferee corporation, and after
the exchange the stock of the corporation
in control of the transferee corporation
are regularly traded under Treas. Reg.
§ 1.897–1(n) and Temp. Treas. Reg.
§ 1.897–9T(d)(1) and (2) on an established
securities market under § 1.897–1(m), and
in the case where the transferor corporation would have been a USRPHC at any
time within the five year period ending
on the date of the reorganization if the
transferor corporation had been a domestic corporation, no foreign shareholder of
the transferor corporation owned a more
than five percent interest in the transferor
corporation at such time under the rules
of Treas. Reg. § 1.897–1(c)(2)(iii) and
Temp. Treas. Reg. § 1.897–9T.
Regarding reorganizations under section 368(a)(1)(A) by reason of section
368(a)(2)(E): prior to the exchange the
stock of the transferee corporation and
the stock of the corporation in control
of the transferor corporation, and after
the exchange the stock of the corporation
that controls the transferee corporation
are regularly traded under Treas. Reg.
§ 1.897–1(n) and Temp. Treas. Reg.
§ 1.897–9T(d)(1) and (2) on an established
securities market under § 1.897–1(m), and
in the case where the transferor corporation or the corporation in control of the
transferor corporation would have been
a USRPHC at any time within the five
year period ending on the date of the
reorganization if either corporation had
been a domestic corporation, no foreign
shareholder of the corporation in control
of transferor corporation owned a more
than five percent interest in the transferor
corporation at such time under the rules
of Treas. Reg. § 1.897–1(c)(2)(iii) and
Temp. Treas. Reg. § 1.897–9T.
(c) Revision to the rules of Temp. Treas.
Reg. § 1.897–6T(b)(1)(iii) relating to foreign-to-foreign section 351 transactions
and section 368(a)(1)(B) reorganizations
As discussed above, Temp. Treas. Reg.
§ 1.897–6T(b)(1) contains exceptions to
the general rule provided in Temp. Treas.
Reg. § 1.897–6T(a)(1) if one of three
forms of exchange occurs and certain other

June 12, 2006

requirements are met. Specifically, Temp.
Treas. Reg. § 1.897–6T(b)(1)(iii) provides a foreign person with nonrecognition
treatment if the foreign person exchanges
stock in a USRPHC under section 351(a)
or section 354(a) in a reorganization described in section 368(a)(1)(B), and, immediately after the exchange, all of the outstanding stock of the transferee corporation (or the stock of the transferee corporation’s parent in the case of a parenthetical B reorganization) is owned in the same
proportions by the same nonresident alien
individuals and foreign corporations that
immediately before the exchange owned
the stock of the USRPHC. However, if any
of the stock in the foreign corporation received by the individual or corporate transferor in the exchange is disposed of within
three years from the date of its receipt,
then the transferor must recognize that portion of the realized gain with respect to the
stock of the USRPHC for which the foreign stock disposed of was received.
The IRS and Treasury have determined
that the final regulations will revise Temp.
Treas. Reg. § 1.897–6T(b)(1)(iii) in
two respects. First, the exception will
be revised so that “all of the stock of
the transferee corporation” is removed
and replaced with “substantially all of
the outstanding stock of the transferee
corporation” and the words “in the same
proportions” will be removed. Second,
the three year period will be revised to one
year.
(d) Removal of the conditions set forth
in Temp. Treas. Reg. § 1.897–6T(b)(2)
As discussed above, to come within
an exception to Temp. Treas. Reg.
§ 1.897–6T(a)(1), not only must an exchange be described in Temp. Treas. Reg.
§ 1.897–6T(b)(1), but it must also satisfy one of the five conditions set forth
in Temp. Treas. Reg. § 1.897–6T(b)(2).
The IRS and Treasury have determined
that the conditions of Temp. Treas. Reg.
§ 1.897–6T(b)(2) are no longer necessary.
Accordingly, the final regulations will
eliminate the conditions of Temp. Treas.
Reg. § 1.897–6T(b)(2).
COMMENTS
Written comments on issues addressed
in this notice may be submitted to the
Office of Associate Chief Counsel International, Attention: Margaret Hogan (No-

June 12, 2006

tice 2006–46), room 4567, CC:INTL:B04,
Internal Revenue Service, 1111 Constitution Avenue, NW, Washington, DC
20224.
Alternatively, taxpayers may
submit comments electronically to [email protected]
Comments will be available for public
inspection and copying.
EFFECTIVE DATE
Final regulations to be issued incorporating the guidance set forth in this notice
regarding exchanges occurring in the context of a statutory merger or consolidation
described in section 368(a)(1)(A) will
generally apply to distributions, transfers, or exchanges occurring on or after
January 23, 2006. Final regulations regarding the revisions to Temp. Treas.
Reg. §§ 1.897–5T(c)(2), (4), Treas. Reg.
§1.897–3(c)(5), (d), and Temp. Treas.
Reg. § 1.897–6T(b), except as applicable to section 368(a)(1)(A) transactions,
will apply to distributions, transfers, or
exchanges occurring on or after May 23,
2006. However, taxpayers may choose
to apply these regulatory changes to all
dispositions, transfers, or exchanges occurring before May 23, 2006 during any
taxable year that is not closed by the period
of limitations, provided they do so consistently with respect to all dispositions,
transfers, and exchanges.
Prior to the issuance of the final regulations, taxpayers may rely on the guidance contained in this notice. Taxpayers
applying this notice, however, must do so
consistently with respect to all transactions
within its scope.
PAPERWORK REDUCTION ACT
The collections of information contained in this notice have been reviewed
and approved by the Office of Management and Budget in accordance with the
Paperwork Reduction Act (44 U.S.C.
§ 3507) under control number 1545–2017.
An agency may not conduct or sponsor,
and a person is not required to respond
to, a collection of information unless the
collection of information displays a valid
OMB control number.
The rules of this notice will apply to
a foreign corporation distributing stock
of a USRPHC to its shareholders pursuant to an inbound asset reorganization

1049

or a foreign corporation transferring a
USRPI to another foreign corporation
pursuant to an asset reorganization and
will require such foreign corporations to
satisfy the filing requirements of Temp.
Treas. Reg. § 1.897–5T(d)(1)(iii), as
modified by Notice 89–57, 1989–1 C.B.
698. The specific collections of information are contained in Temp. Treas.
Reg.
§§ 1.897–5T(c)(4)(ii)(C) and
1.897–6T(b)(1). These filing requirements notify the IRS of the transfer and
enable it to verify that the transferor qualifies for nonrecognition and the transferee
will be subject to U.S. tax on a subsequent
disposition of the USRPI. Generally, they
may be satisfied by: (1) filing the information statement required by Temp. Treas.
Reg. § 1.897–5T(d)(1)(iii); (2) filing a
notice of nonrecognition to the IRS in
accordance with the provisions of Treas.
Reg. § 1.1445–2(d)(2); or (3) filing a withholding certificate in accordance with the
requirements of Treas. Reg. § 1.1445–3.
The collections of information are required in order to obtain the benefit of
the nonrecognition provisions. The likely
respondents are businesses.
The estimated total annual reporting and/or recordkeeping burden is 500
hours. The estimated annual burden hour
per respondent and/or recordkeeper is 1
hour. The estimated number of respondents and/or recordkeepers is 500. The
estimated frequency of response is occasional.
Books or records relating to a collection
of information must be retained as long as
their statements may become material in
the administration of any internal revenue
law. Generally, tax returns and tax information are confidential, as required by 26
U.S.C. § 6103.
EFFECT ON OTHER DOCUMENTS
Notice 89–85, 1989–2 C.B. 403 is amplified.
DRAFTING INFORMATION
The principal author of this notice is
Margaret A. Hogan of the Office of Associate Chief Counsel (International). For
further information regarding this notice,
contact Ms. Hogan at (202) 622–3860 (not
a toll-free call).

2006–24 I.R.B.