Internal Revenue Bulletin:  2009-4 

January 26, 2009 


Notice of Proposed Rulemaking by Cross-Reference to Temporary Regulations Guidance Regarding the Treatment of Stock of a Controlled Corporation Under Section 355(a)(3)(B)


Internal Revenue Service (IRS), Treasury.


Notice of proposed rulemaking by cross-reference to temporary regulations.


In this issue of the Bulletin, the IRS is issuing temporary regulations (T.D. 9435) giving guidance regarding the distribution of stock of a controlled corporation acquired in a transaction described in section 355(a)(3)(B) of the Internal Revenue Code. This action is necessary in light of amendments to section 355(b). The text of those regulations also serves as the text of these proposed regulations. These regulations will affect corporations and their shareholders.


Written or electronic comments and requests for a public hearing must be received by March 16, 2009.


Send submissions to CC:PA:LPD:PR (REG-150670-07), room 5203, Internal Revenue Service, PO Box 7604, Ben Franklin Station, Washington, DC 20044. Submissions may be hand-delivered Monday through Friday between the hours of 8 a.m. and 4 p.m. to CC:PA:LPD:PR (REG-150670-07), Courier’s Desk, Internal Revenue Service, 1111 Constitution Avenue, NW, Washington, DC 20224, or sent electronically via the Federal eRulemaking Portal at (IRS REG-150670-07).


Concerning the proposed regulations, Russell P. Subin, (202) 622-7790; concerning submission of comments and/or requests for a public hearing, Oluwafunmilayo (Funmi) Taylor, (202) 622-7180 (not toll-free numbers).


Background and Explanation of Provisions

Temporary regulations in this issue of the Bulletin amend the Income Tax Regulations (26 CFR part 1) under section 355(a)(3)(B) regarding the distribution of stock of a controlled corporation acquired in a transaction described in section 355(a)(3)(B). The temporary regulations revise §1.355-2(g) to reflect issues arising under section 355(b)(3), as enacted by the Tax Increase Prevention and Reconciliation Act of 2005, Public Law 109-222 (120 Stat. 345), and modified by the Tax Technical Corrections Act of 2007, Public Law 110-172 (121 Stat. 2473, 2476). The text of those regulations also serves as the text of these proposed regulations. The preamble to the temporary regulations explains the amendments.

Special Analyses

It has been determined that this notice of proposed rulemaking is not a significant regulatory action as defined in Executive Order 12866. Therefore, a regulatory assessment is not required. It is hereby certified that these regulations will not have a significant economic impact on a substantial number of small entities. This certification is based on the fact that section 355(a)(3)(B) generally applies to parent-subsidiary groups of corporations, which tend to be larger businesses, and that these regulations primarily grant relief from the application of section 355(a)(3)(B) in certain situations. 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, these regulations have been submitted to the Chief Counsel for Advocacy of the Small Business Administration for comment on their impact on small business.

Comments and Requests for a Public Hearing

Before these proposed regulations are adopted as final regulations, consideration will be given to any written (a signed original and eight (8) copies) or electronic comments that are submitted timely to the IRS. The IRS and Treasury Department request comments on the clarity of the proposed rules and how they can be made easier to understand. As described in the preamble to the temporary regulations, comments are also requested regarding the overall approach taken in these proposed rules, including the extent to which the definition of a taxable transaction should be the same under section 355(a)(3)(B) and section 355(b), and whether the exception for acquisitions from affiliates should be the same under those sections. Comments are also requested regarding the need for future guidance described in sections 4.A. and 4.B. of such preamble, relating to predecessors of distributing corporations, acquisitions involving corporations that join the distributing corporation’s separate affiliated group, predecessors of controlled corporations, acquisitions involving corporations that join the controlled corporation’s separate affiliated group, the application of Dunn Trust v. Commissioner, 86 T.C. 745 (1986), and the treatment of stock issuances by the controlled corporation to the distributing corporation. Comments are also requested regarding the potential application of the hot stock rule to redemptions of controlled corporation stock described in section 4.C. of such preamble. With respect to redemptions, comments are specifically requested regarding the circumstances under which section 355(a)(3)(B) should apply.

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.

Proposed Amendments to the Regulations

Accordingly, 26 CFR part 1 is proposed to be amended as follows:


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 1.355-2(g) and (i) also issued under 26 U.S.C. 355(b)(3)(D). * * *

Par. 2. Section 1.355-2 is amended by revising paragraph (g) and adding paragraph (i) to read as follows:

§1.355-2 Limitations.

* * * * *

(g) [The text of the proposed amendments to §1.355-2(g) is the same as the text of §1.355-2T(g) published elsewhere in this issue of the Bulletin].

* * * * *

(i) [The text of the proposed amendments to §1.355-2(i) is the same as the text of §1.355-2T(i) published elsewhere in this issue of the Bulletin].

Steve T. Miller,
(Acting) Deputy Commissioner for
Services and Enforcement.


(Filed by the Office of the Federal Register on December 12, 2008, 8:45 a.m., and published in the issue of the Federal Register for December 15, 2008, 73 F.R. 75979)

Drafting Information

The principal author of these regulations is Russell P. Subin of the Office of Associate Chief Counsel (Corporate). However, other personnel from the IRS and Treasury Department participated in their development.

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