n-06-70.pdf

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Part III – Administrative, Procedural, and Miscellaneous

Announcement of amendment to effective date provision of Treas. Reg. §1.7874-
2T

Notice 2006-70

This notice announces that the Treasury Department and the Internal
Revenue Service (IRS) will, when finalizing Treas. Reg. §1.7874-2T, amend the
effective date in Treas. Reg. §1.7874-2T(j), as it applies to certain acquisitions
initiated prior to December 28, 2005.
BACKGROUND
On December 28, 2005, the Treasury Department and the IRS issued TD
9238, 2006-6 I.R.B. 408 (Feb. 6, 2006), Guidance Under Section 7874 for
Determining Ownership by Former Shareholders or Partners of Domestic
Entities, which promulgated Treas. Reg. §1.7874-1T. The preamble to TD 9238
states that the IRS and the Treasury Department are considering issuing
regulations, which may be retroactive, to address certain structures which have
the effect of inversion transactions and therefore should be subject to section
7874. Those structures include situations in which the shareholders (or partners)
of a domestic corporation (or domestic partnership) arrange to transfer their
shares (or partnership interests) to a newly formed foreign entity for which an
entity classification election under Treas. Reg. §301.7701-3 is made to treat such

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entity as a foreign partnership for Federal tax purposes. The preamble noted
that other such structures involve the use of exchangeable shares to avoid the
application of section 7874.
On June 6, 2006, the Treasury Department and the IRS issued TD 9265,
Guidance Under Section 7874 Regarding Expatriated Entities and Their Foreign
Parents, which promulgated Treas. Reg. §1.7874-2T. Treasury Reg. §1.7874-2T
addresses the concerns raised in the preamble to Treas. Reg. §1.7874-1T
involving acquisitions by foreign partnerships and exchangeable shares.
Accordingly, Treas. Reg. §1.7874-2T(e) generally provides that any foreign
partnership that would be treated as a corporation under section 7704 of the
Code (but for the application of section 7704(c)) will be treated as a foreign
corporation for purposes of determining whether the partnership is a surrogate
foreign corporation, as the term is defined in section 7874. In addition, Treas.
Reg. §1.7874-2T(f) generally provides that options and similar interests held by a
former shareholder or former partner of the expatriated entity by reason of
holding stock or a partnership interest in the expatriated entity will be treated, for
purposes of the owner continuity test in section 7874, as exercised, to the extent
that the effect is to treat the foreign corporation as a surrogate foreign
corporation.
The effective date provision in Treas. Reg. §1.7874-2T(j) provides that
Treas. Reg. §1.7874-2T applies to acquisitions completed on or after June 6,
2006. The effective date provision does not, however, address situations in
which a binding commitment to make an acquisition described in section

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7874(a)(2)(B)(i) had been entered into prior to June 6, 2006, but such acquisition
had not been completed prior to June 6, 2006.
DISCUSSION
The Treasury Department and the IRS will, when finalizing Treas. Reg.
§1.7874-2T, amend the effective date provision in Treas. Reg. §1.7874-2T(j)
such that Treas. Reg. §1.7874-2 will not apply to an acquisition otherwise
described in section 7874(a)(2)(B)(i) that was completed on or after June 6,
2006, provided such acquisition was entered into pursuant to a written
agreement which was (subject to customary conditions) binding on December
28, 2005, and at all times thereafter (binding commitment). For purposes of the
preceding sentence, a binding commitment shall include entering into options
and similar interests in connection with one or more written agreements
described in the preceding sentence. Accordingly, the provisions of Treas. Reg.
§1.7874-2T, when finalized, will not apply to acquisitions that occur, in whole or
in part, as a result of the exercise of such options or similar interests.
EFFECTIVE DATE
Taxpayers may rely on this notice until the issuance of regulations
described herein.
COMMENTS
Written comments on the issues addressed in this notice may be
submitted to the Office of Associate Chief Counsel International, Attention: Milton
M. Cahn (Notice 2006-70), room 4555, CC:INTL:BR4, Internal Revenue Service,
1111 Constitution Avenue, NW, Washington, DC, 20224. Alternatively, taxpayers

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may submit comments electronically to
Notice.Comments@m1.irscounsel.treas.gov. Comments will be available for
public inspection and copying. Treasury and the IRS request comments by
November 30, 2006.
DRAFTING INFORMATION
The principal author of this notice is Milton M. Cahn of the Office of
Associate Chief Counsel (International). For further information regarding this
notice contact Mr. Cahn at (202) 622-3860 (not a toll-free call).