n-10-25.pdf

Preserve advance releases and the authoritative Internal Revenue Bulletin rendition; directory timestamps are file-publication metadata, not legal effective dates. HTML bulletins begin June 2003; earlier available issues require full PDF parsing.

This collection currently includes the publisher’s available advance-release directory. Historical bulletin renditions are discovered separately; an advance-release record alone does not certify the collection archive complete.

# Part III - Administrative, Procedural, and Miscellaneous

## INTERIM GUIDANCE ON MEASUREMENT OF CONTINUITY OF INTEREST IN REORGANIZATIONS

Notice 2010-25

This notice pertains to the continuity of interest test generally applicable to
reorganizations described in section 368 of the Internal Revenue Code.

### I. PURPOSE

Under section 7805(e)(2) of the Internal Revenue Code, temporary regulations
expire three years after issuance, if not earlier withdrawn. Section 1.368-1T(e)(2) of the
Income Tax Regulations will accordingly expire on March 19, 2010. The purpose of this
notice is to provide taxpayers with interim guidance applicable to the period between the
expiration of the temporary regulations and the issuance of replacement guidance.
II. BACKGROUND AND INTERIM GUIDANCE

The Internal Revenue Code of 1986 (Code) generally provides nonrecognition
treatment for reorganizations described in section 368 of the Code. Besides satisfying
the statutory and other requirements, in order to qualify as a reorganization, a
transaction generally must satisfy the continuity of interest (COI) requirement. COI
requires that, in substance, a substantial part of the value of the proprietary interests in
the target corporation be preserved in the reorganization.

<!-- PageBreak -->

On March 20, 2007, the Internal Revenue Service (Service) and the Treasury
Department (Treasury) published temporary regulations § 1.368-1T(e)(2) (TD 9316,
2007-1 C.B. 962) and proposed regulations (REG-146247-06, 2007-1 C.B. 977) in the
Federal Register (72 FR 12974 and 72 FR 13058, respectively). The text of the
temporary regulations and the proposed regulations is the same. The Service and the
Treasury intend to issue final regulations, but do not expect to issue such regulations
prior to the expiration of the temporary regulations. The purpose of this notice is to
provide taxpayers with interim guidance applicable to the period between the expiration
of the temporary regulations and the issuance of new regulations.

After expiration of the temporary regulations and prior to the issuance of new
regulations, taxpayers may apply the rules set forth in the proposed regulations
notwithstanding that the temporary regulations have expired. However, the target
corporation, the issuing corporation, the controlling corporation of the acquiring
corporation if stock thereof is provided as consideration in the transaction, and any
direct or indirect transferee of transferred basis property from any of the foregoing, may
not apply the provisions of the proposed regulations unless all such taxpayers elect to
apply the provisions of such regulations. This requirement will be satisfied if none of the
specified parties adopts treatment inconsistent with this election.

### DRAFTING INFORMATION

The principal author of this notice is Richard Starke of the Office of Associate
Chief Counsel (Corporate). For further information regarding this notice, please
contact Richard Starke at (202) 622-7790 (not a toll-free call).