n-02-77.pdf

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Part III - Administrative, Procedural, and Miscellaneous

Announcement of Amendments to Regulations under Section 367 of the Internal
Revenue Code

Notice 2002-77

The Internal Revenue Service (the AService@) is publishing Rev. Rul. 2002-85
contemporaneously with the issuance of this Notice. Rev. Rul. 2002-85 holds that an
acquiring corporation=s transfer of the target corporation=s assets to a subsidiary
controlled by the acquiring corporation pursuant to a plan of reorganization will not
prevent a transaction that otherwise qualifies as a reorganization under section
368(a)(1)(D) from so qualifying. This Notice announces that the Treasury and the
Service will amend the regulations under Treas. Reg. '1.367(a)-3(d) to provide
specifically that a reorganization under section 368(a)(1)(D) followed by the transfer of
all or a portion of a target corporation=s assets to a controlled subsidiary pursuant to a
plan of reorganization constitutes an indirect transfer of stock or securities for purposes
of Treas. Reg. '1.367(a)-3.
I. BACKGROUND
Section 367(a)(1) requires a U.S. person who transfers property (including stock
or securities) to a foreign corporation in connection with an exchange described in
section 332, 351, 354, 356, or 361 to recognize gain (but not loss) on the transfer,
unless the transfer qualifies for an exception to this general rule. Transfers covered by

section 367(a)(1) also include indirect and constructive transfers. Treas. Reg.
'1.367(a)-1T(c)(1).
Treas. Reg. '1.367(a)-3 contains rules that address transfers of stock or
securities by a U.S. person to a foreign corporation in an exchange described in section
367(a). For these purposes, certain transactions that are in form asset transfers are
treated as stock transfers. For example, Treas. Reg. '1.367(a)-3(d)(1)(v) treats as an
indirect stock transfer a U.S. person=s exchange of stock or securities of a corporation
for voting stock or securities of a foreign acquiring corporation in a reorganization
described in section 368(a)(1)(C) in which the acquiring corporation transfers the
acquired corporation=s assets to a subsidiary controlled by the acquiring corporation in a
transaction described in section 368(a)(2)(C). In the case of a reorganization in which
part but not all of the assets of the acquired corporation are transferred pursuant to
section 368(a)(2)(C), the transaction is considered to be an indirect transfer of stock or
securities only to the extent of the assets so transferred. Treas. Reg. '1.367(a)-
3(d)(1)(v).
In Rev. Rul. 2002-85, pursuant to a plan of reorganization, (i) a corporation (the
Atarget corporation@) transfers all of its assets to another corporation (the Aacquiring
corporation@) in exchange for consideration consisting of 70 percent acquiring
corporation voting stock and 30 percent cash, (ii) the target corporation then liquidates,
distributing the acquiring corporation voting stock and cash to its shareholder, and (iii)
the acquiring corporation subsequently transfers the target corporation=s assets to a
preexisting, wholly owned subsidiary of the acquiring corporation. Rev. Rul. 2002-85
holds that the acquiring corporation=s transfer of the target corporation=s assets to its

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controlled subsidiary as part of a plan of reorganization will not prevent a transaction
that otherwise qualifies as a reorganization under section 368(a)(1)(D) from so
qualifying.
II. TREATMENT OF A REORGANIZATION UNDER SECTION 368(a)(1)(D)
FOLLOWED BY A TRANSFER OF THE ACQUIRED CORPORATION=S
ASSETS TO A CONTROLLED SUBSIDIARY UNDER THE INDIRECT STOCK
TRANSFER RULES.

Consistent with the current rules for transactions described in sections
368(a)(1)(C) and (a)(2)(C), the Treasury and the Service will amend the regulations
under section 367 to provide specifically that a U.S. person=s exchange of stock or
securities of a corporation (the acquired corporation) for stock or securities of a foreign
acquiring corporation in a reorganization under section 368(a)(1)(D) in which the foreign
acquiring corporation transfers part or all of the acquired corporation=s assets to a
subsidiary controlled by the acquiring corporation pursuant to the plan of reorganization
constitutes an indirect transfer of stock or securities by the U.S. person to the foreign
acquiring corporation under Treas. Reg. '1.367(a)-3(d). In the case of a reorganization
under section 368(a)(1)(D) in which part but not all of the assets of the acquired
corporation are transferred to a subsidiary controlled by the acquiring corporation
pursuant to the plan of reorganization, the regulations will provide that the transaction is
considered to be an indirect transfer of stock or securities to the extent of the assets so
transferred. The amendment to the regulations under section 367 described in this
Notice will be effective for transfers occurring after December 9, 2002. For additional
guidance concerning transfers that occurred on or after July 20, 1998 and on or before
December 9, 2002, see Rev. Rul. 2002-85.

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III. DRAFTING INFORMATION AND REQUEST FOR COMMENTS
The principal author of this Notice is Richard Osborne of the Office of Associate
Chief Counsel (International). However, other personnel from the Service and the
Treasury participated in its development. For further information regarding this Notice,
contact Mr. Osborne at (202) 622-3036 (not a toll-free call).
Written comments concerning this Notice may be submitted to the Associate
Chief Counsel (International), Attention: Richard Osborne (Notice 2002-77), Room
4573, CC:Intl:Br4, Internal Revenue Service, 1111 Constitution Avenue NW,
Washington DC 20224. Alternatively, taxpayers may submit comments directly to the
IRS Internet site at
http://www.irs.ustreas.gov/prod/tax_regs/comments.html.

Comments will be available for public inspection and copying. The Treasury and the
Service request comments by January 15, 2003.