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Bulletin No. 1996–19

May 6, 1996

HIGHLIGHTS

OF THIS ISSUE

These synopses are intended only as aids to the reader in

identifying the subject matter covered. They may not be

relied upon as authoritative interpretations.

INCOME TAX

EXCISE TAX

Rev. Rul. 96–24, page 5.

Federal rates; adjusted federal rates; adjusted federal

long-term rate, and the long-term exempt rate. For

purposes of sections 1274, 1288, 382, and other

sections of the Code, tables set forth the rates for May

1996.

Notice 96–28, page 7.

A determination has been made to add butyl benzyl

phthalate to the list of taxable substances in section

4672(a)(3) of the Code.

Rev. Rul. 96–25, page 4.

Fringe benefits aircraft valuation formula. For purposes of

section 1.61–21(g) of the regulations, relating to the

rule for valuing non-commercial flights on employerprovided aircraft, the Standard Industry Fare Level

(SIFL), cents-per-mile rates, and terminal charges in

effect for 1996 are set forth. Rev. Rul. 95–66

modified.

Notice 96–29, page 7.

Credit for producing fuel from a nonconventional source,

section 29 inflation adjustment factor, and section 29

reference price. This notice publishes the section 29

inflation adjustment factor, nonconventional source fuel

credit, and the section 29 reference price for calendar

year 1995. These data are used to determine the credit

allowable on fuel produced from a nonconventional

source under section 29 of the Code.

ADMINISTRATIVE

INTL–062–90; INTL–0032–93; INTL–52–86;

INTL–52–94, page 26.

General revision of regulations under Chapter 3 of the

Code relating to withholding of tax on U.S. source

income paid to foreign persons and related collection,

refunds, and credits; revision of information reporting

regulations under subpart B of Chapter 61 and backup

withholding regulations under section 3406; and

removal of regulations under part 35a and certain

regulations under income tax treaties.

Rev. Proc. 96–30, page 8.

Section 355 checklist questionnaire. This procedure sets

forth in a checklist questionnaire the information that

must be included in a request for rulings under section

355.

Announcement 96–38, page 84.

The instructions for Schedule SSA (Form 5500),

Annual Registration Statement Identifying Separated

Participants With Deferred Vested Benefits, are

corrected.

EXEMPT ORGANIZATIONS

Announcement 96–40, page 85.

T.D. 8653, 1996–12 I.R.B. 4, relating to the character

and timing of gain or loss from certain hedging

transactions entered into by members of a consolidated

group, is corrected.

Announcement 96–39, page 84.

Families for Children, Golden Valley, MN, no longer

qualifies as an organization to which contributions are

deductible under section 170 of the Code.

Finding Lists begin on page 87.

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Mission of the Service

The purpose of the Internal Revenue Service is to

collect the proper amount of tax revenue at the least

cost; serve the public by continually improving the

quality of our products and services; and perform in a

manner warranting the highest degree of public

confidence in our integrity, efficiency and fairness.

Statement of Principles

of Internal Revenue

Tax Administration

The function of the Internal Revenue Service is to

administer the Internal Revenue Code. Tax policy

for raising revenue is determined by Congress.

With this in mind, it is the duty of the Service to

carry out that policy by correctly applying the laws

enacted by Congress; to determine the reasonable

meaning of various Code provisions in light of the

Congressional purpose in enacting them; and to

perform this work in a fair and impartial manner,

with neither a government nor a taxpayer point of

view.

At the heart of administration is interpretation of the

Code. It is the responsibility of each person in the

Service, charged with the duty of interpreting the

law, to try to find the true meaning of the statutory

provision and not to adopt a strained construction in

the belief that he or she is ‘‘protecting the revenue.’’

The revenue is properly protected only when we ascertain and apply the true meaning of the statute.

The Service also has the responsibility of applying

and administering the law in a reasonable,

practical manner. Issues should only be raised by

examining officers when they have merit, never

arbitrarily or for trading purposes. At the same

time, the examining officer should never hesitate

to raise a meritorious issue. It is also important

that care be exercised not to raise an issue or to

ask a court to adopt a position inconsistent with

an established Service position.

Administration should be both reasonable and

vigorous. It should be conducted with as little

delay as possible and with great courtesy and

considerateness. It should never try to overreach,

and should be reasonable within the bounds of law

and sound administration. It should, however, be

vigorous in requiring compliance with law and it

should be relentless in its attack on unreal tax

devices and fraud.

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Introduction

The Internal Revenue Bulletin is the authoritative

instrument of the Commissioner of Internal Revenue for

announcing official rulings and procedures of the

Internal Revenue Service and for publishing Treasury

Decisions, Executive Orders, Tax Conventions, legislation, court decisions, and other items of general

interest. It is published weekly and may be obtained

from the Superintendent of Documents on a subscription basis. Bulletin contents of a permanent nature are

consolidated semiannually into Cumulative Bulletins,

which are sold on a single-copy basis.

It is the policy of the Service to publish in the Bulletin

all substantive rulings necessary to promote a uniform

application of the tax laws, including all rulings that

supersede, revoke, modify, or amend any of those

previously published in the Bulletin. All published

rulings apply retroactively unless otherwise indicated.

Procedures relating solely to matters of internal

management are not published; however, statements of

internal practices and procedures that affect the rights

and duties of taxpayers are published.

Revenue rulings represent the conclusions of the

Service on the application of the law to the pivotal facts

stated in the revenue ruling. In those based on

positions taken in rulings to taxpayers or technical

advice to Service field offices, identifying details and

information of a confidential nature are deleted to

prevent unwarranted invasions of privacy and to comply

with statutory requirements.

Rulings and procedures reported in the Bulletin do not

have the force and effect of Treasury Department

Regulations, but they may be used as precedents.

Unpublished rulings will not be relied on, used, or cited

as precedents by Service personnel in the disposition of

other cases. In applying published rulings and procedures, the effect of subsequent legislation, regulations,

court decisions, rulings, and procedures must be

considered, and Service personnel and others concerned are cautioned against reaching the same

conclusions in other cases unless the facts and

circumstances are substantially the same.

The Bulletin is divided into four parts as follows:

Part I.—1986 Code.

This part includes rulings and decisions based on

provisions of the Internal Revenue Code of 1986.

Part II.—Treaties and Tax Legislation.

This part is divided into two subparts as follows:

Subpart A, Tax Conventions, and Subpart B, Legislation

and Related Committee Reports.

Part III.—Administrative, Procedural, and Miscellaneous.

To the extent practicable, pertinent cross references to

these subjects are contained in the other Parts and

Subparts. Also included in this part are Bank Secrecy

Act Administrative Rulings. Bank Secrecy Act Administrative Rulings are issued by the Department of the

Treasury’s Office of the Assistant Secretary

(Enforcement).

Part IV.—Items of General Interest.

With the exception of the Notice of Proposed Rulemaking and the disbarment and suspension list included in

this part, none of these announcements are consolidated in the Cumulative Bulletins.

The first Bulletin for each month includes an index for

the matters published during the preceding month.

These monthly indexes are cumulated on a quarterly

and semiannual basis, and are published in the first

Bulletin of the succeeding quarterly and semi-annual

period, respectively.

The Bulletin Index-Digest System, a research and

reference service supplementing the Bulletin, may be

obtained from the Superintendent of Documents on a

subscription basis. It consists of four Services: Service

No. 1, Income Tax; Service No. 2, Estate and Gift

Taxes; Service No. 3, Employment Taxes; Service No.

4, Excise Taxes. Each Service consists of a basic

volume and a cumulative supplement that provides (1)

finding lists of items published in the Bulletin, (2)

digests of revenue rulings, revenue procedures, and

other published items, and (3) indexes of Public Laws,

Treasury Decisions, and Tax Conventions.

The contents of this publication are not copyrighted and may be reprinted freely. A citation of the Internal Revenue Bulletin as the source would be appropriate.

For sale by the Superintendent of Documents U.S. Government Printing Office, Washington, D.C. 20402.

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Part I. Rulings and Decisions Under the Internal Revenue Code of 1986

Section 61.—Gross Income Defined

Rev. Rul. 96–25

26 CFR 1.61–21: Taxation of fringe

benefits.

For purposes of the taxation of fringe

benefits under section 61 of the Internal

Revenue Code, section 1.61–21(g) of

the Income Tax Regulations provides a

rule for valuing noncommercial flights

on employer-provided aircraft. Section

1.61–21(g)(5) of the Income Tax Regulations provides an aircraft valuation

formula to determine the value of such

flights. The value of a flight is determined under the base aircraft valuation

formula (also known as the Standard

Fringe benefits aircraft valuation

formula. For purposes of section 1.61–

21(g) of the regulations, relating to the

rule for valuing non-commercial flights

on employer-provided aircraft, the

Standard Industry Fare Level (SIFL),

cents-per-mile rates and terminal

charges in effect for 1996 are set forth.

Rev. Rul. 95–66 modified.

Period During Which the

Flight Was Taken

1/1/96-6/30/96

EFFECT ON OTHER REVENUE

RULING

Rev. Rul. 95–66, 1995–40 I.R.B. 4,

is modified.

DRAFTING INFORMATION

The principal author of this Revenue

ruling is Thomas R. Foley of the Office

of the Associate Chief Counsel

(Employee Benefits and Exempt Organizations). For further information regarding this revenue ruling contact Mr.

Foley on (202) 622-6050 (not a tollfree call).

Terminal Charge

$32.20

The adjusted applicable federal short-term,

mid-term, and long-term rates are set forth for

the month of May 1996. See Rev. Rul. 96–24,

page 5.

Section 280G.—Golden Parachute

Payments

Federal short-term, mid-term, and long-term

rates are set forth for the month of May 1996.

See Rev. Rul. 96–24, page 5.

SIFL Mileage Rates

Up to 500 miles = $.1761 per mile

501–1500 miles = $.1343

Over 1500 miles = $.1291

Section 355.—Distribution of stock

and securities of a controlled

corporation

Section 468.—Special Rules for

Mining and Solid Waste Reclamation

and Closing Costs

25 CFR 1.355–1: Distribution of stock and

securities of a controlled corporation.

The adjusted applicable federal short-term,

mid-term, and long-term rates are set forth for

the month of May 1996. See Rev. Rul. 96–24,

page 5.

The revenue procedure sets forth in a checklist

questionnaire the information that must be

included in a request for rulings under § 355. See

Rev. Proc. 96–30, page 8.

Section 382.—Limitation on Net

Operating Loss Carryforwards and

Certain Built-In Losses Following

Ownership Change

The adjusted federal long-term rate is set forth

for the month of May 1996. See Rev. Rul. 96–

24, page 5.

Section 42.—Low-Income Housing

Credit

Industry Fare Level formula or SIFL) by

multiplying the SIFL cents-per-mile

rates applicable for the period during

which the flight was taken by the

appropriate aircraft multiple provided in

section 1.61–21(g)(7) and then adding

the applicable terminal charge. The

SIFL cents-per-mile rates in the formula

and the terminal charge are calculated

by the Department of Transportation and

are revised semi-annually.

The following chart sets forth the

terminal charges and SIFL mileage

rates:

Section 412.—Minimum Funding

Standards

The adjusted applicable federal short-term,

mid-term, and long-term rates are set forth for

the month of May 1996. See Rev. Rul. 96–24,

page 5.

Section 467.—Certain Payments for

the Use of Property or Services

The adjusted applicable federal short-term,

mid-term, and long-term rates are set forth for

the month of May 1996. See Rev. Rul. 96–24,

page 5.

Section 483.—Interest on Certain

Deferred Payments

The adjusted applicable federal short-term,

mid-term, and long-term rates are set forth for

the month of May 1996. See Rev. Rul. 96–24,

page 5.

Section 807.—Rules for Certain

Reserves

The adjusted applicable federal short-term,

mid-term, and long-term rates are set forth for

the month of May 1996. See Rev. Rul. 96–24,

page 5.

Section 846.—Discounted Unpaid

Losses Defined

The adjusted applicable federal short-term,

mid-term, and long-term rates are set forth for

the month of May 1996. See Rev. Rul. 96–24,

page 5.

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Section 1274.—Determination of

Issue Price in the Case of Certain

Debt Instruments Issued for

Property

Rev. Rul. 96–24

(Also Sections 42, 280G, 382, 412, 467, 468,

482, 483, 807, 846, 1288, 7520, 7872.)

Federal rates; adjusted federal

rates; adjusted federal long-term rate,

and the long-term exempt rate. For

purposes of sections 1274, 1288, 382,

and other sections of the Code, tables

set forth the rates for May 1996.

This revenue ruling provides various

prescribed rates for federal income tax

purposes for May 1996 (the current

month.) Table 1 contains the shortterm, mid-term, and long-term applicable federal rates (AFR) for the current

month for purposes of section 1274(d)

of the Internal Revenue Code. Table 2

contains the short-term, mid-term, and

long-term adjusted applicable federal

rates (adjusted AFR) for the current

month for purposes of section 1288(b).

Table 3 sets forth the adjusted federal

long-term rate and the long-term taxexempt rate described in section 382(f).

Table 4 contains the appropriate percentages for determining the lowincome housing credit described in

section 42(b)(2) for buildings placed in

service during the current month. Finally, Table 5 contains the federal rate

for determining the present value of an

annuity, an interest for life or for a

term of years, or a remainder or a

reversionary interest for purposes of

section 7520.

REV. RUL. 96–24 TABLE 1

Applicable Federal Rates (AFR) for May 1996

Period for Compounding

Annual

Semiannual

Quarterly

Monthly

Short-Term

AFR

110 AFR

120 AFR

130 AFR

Mid-Term

AFR

110 AFR

120 AFR

130 AFR

150 AFR

175 AFR

5.76%

6.35%

6.94%

7.52%

5.68%

6.25%

6.82%

7.38%

5.64%

6.20%

6.76%

7.31%

5.61%

6.17%

6.73%

7.27%

6.36%

7.01%

7.65%

8.31%

9.61%

11.26%

6.26%

6.89%

7.51%

8.14%

9.39%

10.96%

6.21%

6.83%

7.44%

8.06%

9.28%

10.81%

6.18%

6.79%

7.40%

8.01%

9.21%

10.72%

Long-Term

AFR

110 AFR

120 AFR

130 AFR

6.83%

7.53%

8.22%

8.93%

6.72%

7.39%

8.06%

8.74%

6.66%

7.32%

7.98%

8.65%

6.63%

7.28%

7.93%

8.58%

Annual

Period for Compounding

Semiannual

Quarterly

Monthly

3.75%

3.72%

3.70%

3.69%

4.69%

4.64%

4.61%

4.60%

5.68%

5.60%

5.56%

5.54%

REV. RUL. 96–24 TABLE 2

Adjusted AFR for May 1996

Short-term

adjusted AFR

Mid-term

adjusted AFR

Long-term

adjusted AFR

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REV. RUL. 96–24 TABLE 3

Rates Under Section 382 for May 1996

Adjusted federal long-term rate for the current month

5.68%

Long-term tax-exempt rate for ownership changes during the current month (the highest of the

adjusted federal long-term rates for the current month and the prior two months.)

5.68%

REV. RUL. 96–24 TABLE 4

Appropriate Percentages Under Section 42(b)(2) for May 1996

Appropriate percentage for the 70% present value low-income housing credit

8.55%

Appropriate percentage for the 30% present value low-income housing credit

3.66%

REV. RUL. 96–24 TABLE 5

Rate Under Section 7520 for May 1996

Applicable federal rate for determining the present value of an annuity, an interest for life or

a term of years, or a remainder or reversionary interest

Section 1288.—Treatment of Original

Issue Discount on Tax-Exempt

Obligations

The adjusted applicable federal short-term,

mid-term, and long-term rates are set forth for

the month of May 1996. See Rev. Rul. 96–24,

page 5.

Section 7520.—Valuation Tables

The adjusted applicable federal short-term,

mid-term, and long-term rates are set forth for

the month of May 1996. See Rev. Rul. 96–24,

page 5.

7.6%

Section 7872.—Treatment of Loans

with Below-Market Interest Rates

The adjusted applicable federal short-term,

mid-term, and long-term rates are set forth for

the month of May 1996. See Rev. Rul. 96–24,

page 5.

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Part III. Administrative, Procedural, and Miscellaneous

Tax on Certain Imported Substances;

Notice of Determination

Notice 96–28

This notice announces a determination, under Notice 89–61, 1989–1

C.B. 717, that the list of taxable

substances in § 4672(a)(3) will be

modified to include butyl benzyl phthalate. This modification is effective

April 1, 1991.

Background

Under § 4672(a), an importer or

exporter of any substance may request

that the Secretary determine whether

that substance should be listed as a

taxable substance. The Secretary shall

add the substance to the list of taxable

substances in § 4672(a)(3) if the Secretary determines that taxable chemicals

constitute more than 50 percent of the

weight, or more than 50 percent of the

value, of the materials used to produce

the substance. This determination is to

be made on the basis of the predominant method of production. Notice

89–61, sets forth the rules relating to

the determination process.

Determination

On March 22, 1996, the Secretary

determined that butyl benzyl phthalate

should be added to the list of taxable

substances in § 4672(a)(3), effective

April 1, 1991.

The rate of tax prescribed for butyl

benzyl phthalate, under § 4671(b)(3), is

$5.54 per ton. This is based upon a

conversion factor for methane of 0.05,

a conversion factor for propylene of

0.17, a conversion factor for xylene of

0.47, a conversion factor for toluene of

0.32, and a conversion factor for

chlorine of 0.26.

The petitioner is Monsanto Company, a manufacturer and exporter of

this substance. No material comments

were received on this petition. The

following information is the basis for

the determination.

HTS number: 2917.39.2000

CAS number: 85–68–7

Butyl benzyl phthalate is derived

from the taxable chemicals methane,

propylene, xylene, toluene, and chlo-

rine and is a liquid produced predominantly by the reaction of n-butanol and

phthalic anhydride, followed by a reaction with benzyl chloride in the presence of a catalyst. n-butanol is manufactured by the hydrogenation of

n-butyraldehyde, which is derived from

propylene and synthesis gas (hydrogen

and synthesis gas are derived from

natural gas). Benzyl chloride is produced by direct photochemical chlorination of toluene. Phthalic anhydride

is produced by the reaction of o-xylene

with air in the presence of a catalyst.

The stoichiometric material consumption formula for this substance is:

CH4 (methane) + C3H6 (propylene) +

C8H10 (xylene) + 3 O 2 (oxygen) +

C7H8 (toluene) + Cl 2 (chlorine)

----- . C19H20O4 (butyl benzyl

phthalate) + 2 HCl (hydrochloric

acid) + H2 (hydrogen) + 2 H 2O

(water)

Butyl benzyl phthalate has been

determined to be a taxable substance

because a review of its stoichiometric

material consumption formula shows

that, based on the predominant method

of production, taxable chemicals constitute 77.25 percent by weight of the

materials used in its production.

The principal author of this notice is

Ruth Hoffman, Office of Assistant

Chief Counsel (Passthroughs and Special Industries). For further information

regarding this notice contact Ruth

Hoffman on (202) 622-3130 (not a tollfree number).

Credit for Producing Fuel From a

Nonconventional Source, Section 29

Inflation Adjustment Factor, and

Section 29 Reference Price

Notice 96–29

This notice publishes the § 29 inflation adjustment factor, the nonconventional source fuel credit, and the §29

reference price for calendar year 1995.

These are used to determine the credit

allowable on fuel produced from a nonconventional source under § 29 of the

Internal Revenue Code. The calendar

year 1995 inflation-adjusted credit applies to the sales of barrel-of-oil

equivalent of qualified fuels sold by a

taxpayer to an unrelated person during

the 1995 calendar year, the domestic

production of which is attributable to

the taxpayer.

BACKGROUND

Section 29(a) provides for a credit

for producing fuel from a nonconventional source, measured in barrel-of-oil

equivalent of qualified fuels, the production of which is attributable to the

taxpayer and sold by the taxpayer to an

unrelated person during the tax year.

The credit is equal to the product of

$3.00 and the appropriate inflation

adjustment factor.

Section 29(b)(1) and (2) provides for

a phaseout of the credit. The credit

allowable under § 29(a) must be reduced by an amount which bears the

same ratio to the amount of the credit

(determined without regard to § 29(b)(1)) as the amount by which the

reference price for the calendar year in

which the sale occurs exceeds $23.50

bears to $6.00. The $3.00 in § 29(a)

and the $23.50 and $6.00 must each be

adjusted by multiplying these amounts

by the 1995 inflation adjustment factor.

In the case of gas from a tight formation, the $3.00 amount in § 29(a)

must not be adjusted.

Section 29(c)(1) defines the term

‘‘qualified fuels’’ to include oil produced from shale and tar sands; gas

produced from geopressurized brine,

Devonian shale, coal seams, or a tight

formation, or biomass; and liquid,

gaseous, or solid synthetic fuels produced from coal (including lignite),

including such fuels when used as

feedstocks.

Section 29(d)(1) provides that the

credit is to be applied only for sale of

qualified fuels the production of which

is within the United States (within the

meaning of § 638(1)) or a possession

of the United States (within the meaning of § 638(2)).

Section 29(d)(2)(A) requires that the

Secretary, not later than April 1 of each

calendar year, determine and publish in

the Federal Register the inflation adjustment factor and the reference price

for the preceding calendar year.

Section 29(d)(2)(B) defines ‘‘inflation adjustment factor’’ for a calendar

year as the fraction the numerator of

which is the GNP implicit price deflator for the calendar year and the

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denominator of which is the GNP

implicit price deflator for calendar year

1979. The term ‘‘GNP implicit price

deflator’’ means the first version of the

implicit price deflator for the gross

national product as computed and

published by the Department of

Commerce.

Section 29(d)(2)(C) defines ‘‘reference price’’ to mean with respect to a

calendar year the Secretary’s estimate

of the annual average wellhead price

per barrel of all domestic crude oil the

price of which is not subject to

regulation by the United States.

Section 29(d)(3) provides that in the

case of a property or facility in which

more than one person has an interest,

except to the extent provided by

regulations prepared by the Secretary,

production from the property or facility

(as the case may be) must be allocated

among the persons in proportion to

their respective interests in the gross

sales from the property or facility.

Section 29(d)(5) and (6) provides

that the term ‘‘barrel-of-oil equivalent’’

with respect to any fuel generally

means that amount of the fuel which

has a Btu content of 5.8 million.

provided for in § 29(b)(1) does not

occur for any qualified fuel sold in

calendar year 1995.

INFLATION ADJUSTMENT

FACTOR AND REFERENCE PRICE

The nonconventional source fuel

credit under § 29(a) is $5.83 per barrelof-oil equivalent of qualified fuels

($3.00 3 1.9439). This amount was

published in the Federal Register on

April 10, 1996 (61 Fed. Reg. 16031).

The inflation adjustment factor for

calendar year 1995 is 1.9439. The

reference price for calendar year 1995

is $14.62. As required by § 29(d)(2)(A), the inflation adjustment factor

and reference price for calendar year

1995 where published in the Federal

Reg. 16031).

PHASE-OUT CALCULATION

Because the calendar year 1995

reference price does not exceed $23.50

multiplied by the inflation adjustment

factor, the phaseout of the credit

CREDIT AMOUNT

DRAFTING INFORMATION

CONTACT

The principal author of this notice is

David G. McMunn of the Office of

Assistant Chief Counsel (Passthroughs

and Special Industries). For further

information regarding this notice contact Mr. McMunn on (202)622-3110

(not a toll-free call).

26 CFR 601.201: Rulings and determination letters.

(Also Part I, § 355; 1.355–1.)

Rev. Proc. 96–30

SECTION 355 CHECKLIST QUESTIONNAIRE CONTENTS

1. PURPOSE

2. BACKGROUND

3. CHANGES

4. INFORMATION TO BE INCLUDED IN REQUESTS FOR RULINGS UNDER § 355 OF THE INTERNAL REVENUE CODE

.01 Information regarding Distributing and Controlled

(1) Identification

(2) Jurisdiction

(3) Taxable year

.02 Ownership of interests in Distributing and Controlled

(1) Capital structure of Distributing and Controlled immediately prior to the distribution

(2) Foreign shareholders

(3) Description of stock, securities, and other property being distributed

(a) Stock

(b) Securities

(d) Timing

(e) Planned stock issuances

(f) Obtaining control

(4) Ownership of stock and securities immediately after the distribution

(a) Interests in Controlled to be held by Distributing

(i) Retention of stock, securities, or options

(ii) Retention of debt

(iii) Purpose for Distributing holding stock, securities, or options in Controlled

(b) Interests in Controlled to be held by shareholders of Distributing

(i) Distribution or exchange

(ii) Stock ownership

(iii) Securities

(iv) Surrender of stock

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(d) Receipt of consideration other than with respect to stock or securities

(i) Shareholder in dual capacity

(ii) Security holder in dual capacity

(iii) Other transfers

.03 Information concerning the businesses of Distributing and Controlled

(1) Description of businesses

(2) Distributing’s Active Businesses

(a) Active conduct during the preceding 5-year period

(b) Employee information

(d) Continuous ownership of an Active Business during the preceding 5-year period

(e) Change in business

(f) Separation of real property, intellectual property, or other intangible property from user

(g) Balance sheets

(h) Profit and loss statements

(3) Description of Active Businesses being transferred by Distributing to Controlled

(4) Pre-existing Controlled’s Active Businesses

(5) Indirect conduct of trade or business through ownership of stock in other corporations (Other

Corporations)

(6) Changes in ownership of an Active Business during the preceding 5-year period

(a) Identity

(b) Date

(d) Consideration

(e) Gain or loss

(7) Stock ownership during the preceding 5-year period

(a) Stock of Controlled or other Corporations continuously owned

(b) Stock of Controlled or other Corporations acquired

(i) Identity

(ii) Date and consideration

(iii) Transaction

(iv) Gain or loss

(8) Continuation of business

.04 Business purpose

(1) Detailed description

(2) Corporate Business Purposes

(3) Alternative transactions

(4) Cross reference to Appendix A

(5) Non-Corporate Business Purposes

(a) General

(b) Shareholder planning

(d) Reduction in federal taxes

(e) Representation

(6) Substantiation of business purpose

(a) Documentation

(b) Third party documentation

(7) Additional documents

(a) Regulatory filings

(b) Material prepared for directors

.05 Device

(1) Dispositions of stock or securities

(a) Representation

(b) Permitted purchases

(i) Detailed description

(ii) Consideration

(iii) Evidence of nondevice

(2) Absence of earnings and profits

(3) Non pro rata distribution

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(4)

Investment and inactive assets

(a) Detailed description

(b) Explanation

(5) Liquidation or sale of assets

.06 Continuity of shareholder interest

.07 Disqualified distribution

.08 Miscellaneous

(1) Transfers and transactions between Distributing and Controlled

(a) Contributions to capital

(b) Liabilities

(d) Matching of income and deductions

(2) Indebtedness

(a) Cancellation of indebtedness

(b) Continuing indebtedness

(3) Consolidated transactions

(4) Continuing transactions between Distributing and Controlled

(5) Investment company

(6) Transfers of money or property to Distributing

(7) Foreign corporation

(8) Other transactions

(9) Plan of reorganization and other relevant documents

(10) Requested rulings

(11) Presubmission conference

5. EFFECT ON OTHER DOCUMENTS

6. EFFECTIVE DATE

DRAFTING INFORMATION

APPENDIX A — BUSINESS PURPOSE GUIDELINES

1. Key employee

2. Stock offering

3. Borrowing

4. Cost savings

5. Fit and focus

6. Competition

7. Facilitating an acquisition of Distributing

8. Facilitating an acquisition by Distributing or Controlled

9. Risk reduction

APPENDIX B — RULING REQUESTS INVOLVING RETENTION OF STOCK OR OPTIONS BY DISTRIBUTING

APPENDIX C — REPRESENTATIONS REGARDING S CORPORATION STATUS

SECTION 1. PURPOSE

SECTION 2. BACKGROUND

This revenue procedure updates Rev. Proc. 86–41, 1986–2 C.B. 716, which sets forth in a

checklist questionnaire the information that must be included in a request for rulings under

§ 355, relating to the nonrecognition of gain or loss on distributions of stock and securities of

controlled corporations.

This checklist is intended to facilitate the filing and processing of ruling requests under

§ 355. It specifies information and representations to be included so that the requests will be

as complete as possible when initially filed. Nevertheless, because the information and

representations necessary to rule on a particular transaction depend upon all the facts and

circumstances, the Service may require information or representations in addition to those set

forth in this revenue procedure.

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SECTION 3. CHANGES

SECTION 4. INFORMATION

TO BE INCLUDED IN

REQUESTS FOR RULINGS

UNDER § 355

Distribution includes

exchanges

Successors of Distributing

or Controlled

Information regarding

Distributing and Controlled

Ownership of interests in

Distributing and Controlled

The general procedures of the Internal Revenue Service with respect to the issuance of

letter rulings and determination letters by the National Office are outlined in the first revenue

procedure published each year (the ‘‘annual revenue procedure’’). See, e.g., Rev. Proc. 96–1,

1996–1 I.R.B. 8. The Service also publishes a revenue procedure, generally in the first

Internal Revenue Bulletin of the year, which provides a list of those areas of the Code under

the jurisdiction of the Associate Chief Counsel (Domestic) for which the Service will not

issue advance letter rulings. See, e.g., Rev. Proc. 96–3, 1996–1 I.R.B. 82. The Service

periodically updates these revenue procedures, along with this checklist questionnaire.

Careful attention to all requirements of the most recent revenue procedures, including this

checklist questionnaire, will aid in the timely processing of ruling requests. Failure to submit

the requisite information and representations will often delay consideration of the transaction

and the issuance of a letter ruling.

This revenue procedure substantially modifies Rev. Proc. 86–41. The principal changes are

to add to, delete, or modify the information and representations requested, and to add an

appendix that provides guidelines with respect to ruling requests involving certain corporate

business purposes. This document also revokes section 3.01(23) of Rev. Proc. 96–3, which

sets forth ‘‘no rule’’ positions regarding certain corporate business purposes.

This section describes the information and representations to be provided in a § 355 ruling

request. The presentation of the information and representations in the ruling request should

follow the organization of this section and use appropriate descriptive headings. Taxpayers are

welcome to provide a narrative description of the transaction to supplement (but not substitute

for) the presentation requested in this section.

A ruling request should address each item in this section and provide all facts relevant to

the transaction. If an item is not applicable, so state and briefly explain why.

Standard representations are set forth throughout this section and are highlighted by the

word ‘‘representation’’ in boldface type. The representations are necessary to ensure that

specific statutory and judicial requirements, and administrative ruling guidelines relating

thereto, are satisfied. Each representation should be submitted in the language requested. If a

representation cannot be submitted exactly as requested, an explanation must be given.

Deviation from the language of the representations should be avoided, except as required by

the facts being described. Unnecessary variations may delay processing the ruling request and

will not be accepted unless reasons satisfactory to the Service are submitted.

The terms ‘‘Distributing’’ and ‘‘Controlled’’ in this document refer to the ‘‘distributing

corporation’’ and ‘‘controlled corporation’’ as described in § 355(a)(1)(A). References to the

term ‘‘distribution’’ include a distribution of stock or securities of Controlled with respect to

Distributing stock, an exchange of Distributing stock or securities for Controlled stock or

securities, or some combination thereof, as the context requires.

Requests for information and representations regarding Distributing or Controlled include,

as the context requires, a request for information (or representations) regarding a successor of

Distributing or Controlled. For example, if Distributing will merge with an acquiring

corporation after the distribution, the representation requested in section 4.03(8) of this

revenue procedure (that is, Distributing will continue to conduct its business) should be

modified to include a similar representation under penalties of perjury by the acquiring

corporation regarding the continuing conduct of Distributing’s business after the merger, in

addition to Distributing’s representation. Similarly, the representation requested in section

4.05(1) of this revenue procedure (that is, there is no plan or intention by the Distributing

shareholders to dispose of their shares in Distributing), should be modified to include a

similar representation regarding dispositions of acquiring corporation shares by the

Distributing shareholders. If a taxpayer believes that information regarding, or a

representation by, a successor is inappropriate or should be modified, the taxpayer must

explain why.

.01

(1) Identification. State the name, employer identification number, and place and date of

incorporation of Distributing and Controlled. If Controlled is not in existence, state its

proposed name and place of incorporation. If Distributing joins in the filing of a consolidated

federal income tax return, provide the name and employer identification number of the

common parent corporation of the affiliated group.

(2) Jurisdiction. Identify the District Office that has or will have examination jurisdiction

over the return of Distributing (sometimes referred to below as the ‘‘taxpayer’’) and of

Controlled.

(3) Taxable year. State the last day of the taxable year of Distributing and Controlled.

.02

(1) Capital structure of Distributing and Controlled immediately prior to the distribution.

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Description of stock

Shareholdings

Description of agreements

Description of securities

Foreign shareholders

Stock, securities, and

property being distributed

Date of distribution

Control

Obtaining control

Post-distribution ownership

of interests in Controlled

by Distributing

Under a separate heading for each corporation, provide the following information with respect

to the stock and securities of Distributing and Controlled that will be outstanding immediately

prior to the distribution:

(a) A complete description of each class of stock, setting forth the rights and privileges of

each class, including voting or nonvoting rights, dividend and liquidation preferences or

limitations, and whether classified as common or preferred stock.

(b) A list of the number of shares and the percentage of each class of stock owned by each

shareholder prior to the distribution. However, if the corporation has more than 100

shareholders, the taxpayer need only list those shareholders owning 5 percent or more of any

class of stock, and state the total number of other shareholders together with the total number

of shares and the percentage that these other shareholders own of each class of stock.

affecting the rights of any shareholder. However, if the corporation has more than 100

shareholders, the taxpayer need only describe agreements affecting shareholders owning

directly, or as a result of the agreement, controlling, 5 percent or more of any class of stock.

(d) A description of any securities and all other outstanding interests (bonds, debentures,

notes, warrants, options, puts, etc.) and a brief explanation as to whether any of these items

should be considered a stock interest.

(2) Foreign shareholders. If Distributing has any foreign shareholders, state whether: (i)

Distributing or Controlled was a United States real property holding corporation (as defined

in § 897(c)(2)) at any time during the 5-year period ending on the date of the distribution,

and (ii) Distributing or Controlled will be a United States real property holding corporation

immediately after the distribution. See § 367(e)(1) and § 897. In addition, if Distributing is

publicly traded, provide a list of all foreign persons owning 5 percent or more of Distributing

stock either before or after the distribution. If Distributing is not publicly traded, provide a

list of all foreign persons owning stock of Distributing either before or after the distribution.

See section 4.08(7) of this revenue procedure for additional information regarding foreign

parties.

(3) Description of stock, securities, and other property being distributed.

(a) Stock. State the number of shares and percentage of each class of stock of Controlled

being distributed. In addition, if preferred stock is being distributed and it is contended that

this stock is not ‘‘section 306 stock,’’ within the meaning of § 306(c), fully explain the

reasons for this contention.

(b) Securities. State the principal amount of each series of securities of Controlled being

distributed.

securities of Controlled, to be distributed or received in the transaction including, but not

limited to, cash, stock rights, warrants, or the payment of expenses incurred in connection

with the transaction (see § 356).

(d) Timing. State the date of the distribution and whether all the stock, securities, and other

property will be distributed on that date. If all the stock, securities, and other property are not

being distributed on the same date, state the approximate length of, and the reasons for, the

delay in the distribution.

(e) Planned stock issuance, etc. Describe any planned or intended stock issuances,

redemptions, or dispositions of Controlled shares. Explain the effect of any of these

transactions on the distribution-of-control requirement of § 355(a)(1)(D), and if property is

being transferred from Distributing to Controlled, the effect on the control-immediately-after

requirement of § 368(a)(1)(D).

(f) Obtaining control. State whether Distributing has modified or will modify its ownership

of Controlled stock, such as in a recapitalization, within the 5-year period preceding the

distribution with the result that Distributing obtained or will obtain control of Controlled, as

defined in § 368(c). Provide complete details, including the information requested in section

4.08(8) of this revenue procedure, with respect to such modifications.

(4) Ownership of stock and securities in Controlled immediately after the distribution.

(a) Interests in Controlled to be held by Distributing (see § 1.355–2(e) of the Income Tax

Regulations).

(i) Retention of stock, securities, or options. State the number of shares and percentage of

each class of stock in, and the principal amount of each series of securities of, Controlled to

be held by Distributing after the distribution and the length of time Distributing will hold this

interest. Describe any options that Distributing will hold after the distribution to acquire stock

in Controlled and the length of time Distributing will hold these options.

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Post-distribution ownership

of interests in Controlled

by shareholders of

Distributing

Post-distribution ownership

of interests in Controlled

by security holders of

Distributing

Information concerning

the businesses of

Distributing and Controlled

(see generally § 1.355–3)

Distributing’s Active

Businesses

(ii) Retention of debt. If Controlled will be indebted to Distributing after the distribution of

Controlled stock, submit the following REPRESENTATION: The indebtedness owed by the

controlled corporation to the distributing corporation after the distribution of the controlled

corporation stock will not constitute stock or securities.

(iii) Purpose for Distributing holding stock, securities, or options in Controlled. If

Distributing will hold stock, securities, or options in Controlled after the distribution, explain

the reasons therefor and why this should not be viewed as in pursuance of a plan having as

one of its principal purposes avoiding federal income tax. See Appendix B of this revenue

procedure regarding favorable rulings with respect to the retention of stock, securities, or

options. State whether a distribution of all the stock or securities of Controlled would be

treated to any extent as a distribution of ‘‘other property’’ under § 356.

(b) Interests in Controlled to be held by shareholders of Distributing.

(i) Distribution or exchange. State whether the distribution of Controlled stock will be pro

rata or non pro rata with respect to the shareholders of Distributing. Fully describe the

transaction between Distributing and its shareholders.

(ii) Stock ownership. State the number of shares and the percentage of each class of stock

outstanding in Distributing and Controlled that will be owned by each shareholder

immediately after the distribution. However, if there will be more than 100 shareholders

immediately after the distribution, the taxpayer need only list those shareholders who will

own 5 percent or more of any class of stock, and state the expected total number of other

shareholders together with the expected total number of shares and the expected percentage

that these other shareholders will own of each class of stock.

(iii) Securities. Identify any shareholders of Distributing receiving securities of Controlled

and state the principal amount of each series of securities to be received in the transaction.

With respect to each shareholder, state the principal amount of each series of Distributing

securities to be surrendered in the transaction, or, if no securities are being exchanged, so

state. See § 1.355–2(f)(1).

(iv) Surrender of stock. If one or more Distributing shareholders will surrender

Distributing stock in the transaction, submit the following REPRESENTATION: The fair market

value of the controlled corporation stock and other consideration to be received by each

shareholder of the distributing corporation will be approximately equal to the fair market

value of the distributing corporation stock surrendered by the shareholder in the exchange.

security holders of Distributing receiving Controlled stock, the total number of shares of each

class of stock being received, and the principal amount of the securities of Distributing being

exchanged. Identify those security holders of Distributing receiving securities of Controlled,

the principal amount being received by each holder, and the principal amount of the securities

of Distributing being exchanged. See § 1.355–2(f)(1). If no securities are being exchanged, so

state. If the securities are, or, immediately after the distribution, will be, held by more than

100 security holders, identify only those security holders that will own 5 percent or more of

the outstanding shares of any class of Controlled stock or of any outstanding series of

Controlled securities immediately after the distribution.

(d) Receipt of consideration other than with respect to stock or securities.

(i) Shareholder in dual capacity. Submit the following REPRESENTATION: No part of the

consideration to be distributed by the distributing corporation will be received by a

shareholder as a creditor, employee, or in any capacity other than that of a shareholder of

the corporation.

(ii) Security holder in dual capacity. If consideration will be distributed to security

holders, submit the following REPRESENTATION: No part of the consideration to be

distributed by the distributing corporation will be received by a security holder as an

employee or in any capacity other than that of a security holder of the corporation.

(iii) Other transfers. State whether the shareholders or security holders of Distributing will

transfer or surrender any property in the transaction other than stock or securities of

Distributing. If so, provide full details.

.03

(1) Description of businesses. Describe each line of business engaged in by Distributing,

Controlled, and their respective subsidiaries, whether or not the business will be relied upon

to meet the requirements of § 355(b). Note which corporations are engaged in each line of

business.

(2) Distributing’s Active Businesses. Submit a complete description of each trade or

business that will be relied upon to meet the requirements of § 355(b) (an ‘‘Active

Business’’), that is conducted directly by Distributing, and that will be retained by

Distributing. Provide the following information with respect to each such Active Business:

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Employee information

Nonemployee information

Continuous ownership of

Active Businesses

conducted during 5-year

period

Change in business during

5-year period

Separation of real

property, intellectual

property, or other

intangible property from

user

Balance sheets

Profit and loss statements

Description of Active

Businesses transferred to

Controlled

Description of pre-existing

Controlled’s Active

Businesses

(a) Active conduct during the preceding 5-year period. Provide all information necessary

to establish that the Active Business is a trade or business that has been actively conducted

for the entire 5-year period ending on the date of the distribution (within the meaning of

§ 1.355–3(b)(2) and (3)). In general, the description should conclusively show that substantial

managerial and operational activities have been directly carried on by the Active Business

during each of the past 5 years.

(b) Employee information. If the Active Business employed fewer than 50 full-time

employees during any of the past 5 years, submit separate lists for each of the past 5 years

showing the job titles of the Active Business’ employees, the function (managerial,

operational, or other) of each position, and the number of persons employed in each position.

Include a brief description of the type of duties performed by each category of employee

during each of these years.

information specified in section 4.03(2)(b) of this revenue procedure with respect to an Active

Business, also state whether Distributing uses persons who are not employees, such as

independent contractors. If so, include a brief description of the duties they perform, and the

percentage of the activities they perform for the Active Business.

(d) Continuous ownership of an Active Business during the preceding 5-year period. State

whether the Active Business has been continuously conducted, within the meaning of

§ 1.355–3(b), by Distributing for the 5-year period ending on the date of distribution. Give

the date Distributing commenced conduct of the Active Business or acquired the Active

Business. If an Active Business has not been continuously conducted by Distributing for such

5-year period, see section 4.03(6) of this revenue procedure.

(e) Change in business. Describe any substantial change during the preceding 5-year

period in the type of business activity conducted or the method of conducting business, such

as substantial changes in: products or services offered, production capacity, assets owned or

used, technology employed, sales or distribution channels, or locations. If the preceding

5-year period includes any time during which there was no business activity, or a significant

amount of time during which there was a substantial reduction in business activity, identify

the period of time, the type and amount of business activity during this period, and the

reasons for the cessation or reduction in activity.

(f) Separation of real property, intellectual property, or other intangible property from

user. State whether all or a portion of any real property, intellectual property, or other

intangible property historically occupied or used by one business will be separated in the

transaction from that business. If so, describe the property. State whether the business

formerly using the property will continue to use the property after the transaction, and the

terms upon which it will be allowed to use the property. Describe any other planned use of

the property after the transaction. Explain the reason for separating the ownership of the

property from its historic user.

(g) Balance sheets. Provide a copy of the most recent balance sheet of Distributing

(including all applicable notes). The balance sheet should not be limited to assets and

liabilities of Distributing’s Active Businesses. Also submit any consolidated balance sheets

prepared for financial accounting purposes that include Distributing.

(h) Profit and loss statements. Submit separate unconsolidated profit and loss statements

(including all applicable notes) for each of the past 5 years for each Active Business. The

statements must show that each business has had gross receipts and operating expenses

(including employee expenses such as payroll withholding taxes) representative of the active

conduct of a trade or business for each of the past 5 years. Submit the following

REPRESENTATION: The 5 years of financial information submitted on behalf of the distributing

corporation is representative of the corporation’s present operation, and with regard to such

corporation, there have been no substantial operational changes since the date of the last

financial statements submitted.

(3) Description of Active Businesses being transferred by Distributing to Controlled. If, in

connection with the plan, Distributing transfers all or part of the assets of one or more of its

Active Businesses (see § 1.355–3(c), example (4)) to either a newly formed or pre-existing

Controlled, identify and submit a complete description of each Active Business or part of an

Active Business being transferred. Submit the information and representation required by

section 4.03(2)(a) through (h) of this revenue procedure for each such Active Business, or part

of an Active Business, being transferred. If property will be transferred from Distributing to

Controlled, submit a pro forma balance sheet for Controlled reflecting the transfer of assets to

Controlled and all liabilities to be assumed or to which the property transferred will be subject.

(4) Pre-existing Controlled’s Active Businesses. If Controlled is a pre-existing corporation,

submit a complete description of each Active Business conducted directly by Controlled.

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Indirect conduct of trade

or business

Active Businesses

acquired during 5-year

period

Stock continuously owned

during 5-year period

Stock acquired during

5-year period

Other changes in

ownership during 5-year

period

Submit the information and representation required by section 4.03(2)(a) through (h) of this

revenue procedure with respect to each such Active Business, treating references to

Distributing as references to Controlled, as appropriate.

(5) Indirect conduct of trade or business through ownership of stock in other

corporations. If either Distributing or Controlled is not directly engaged in an Active

Business but will be so engaged indirectly through ownership of stock and securities in one or

more corporations controlled by it (‘‘Other Corporations’’) immediately after the distribution,

submit the information and representation required by sections 4.03(2)(a) through (h) of this

revenue procedure (treating, for this purpose, each Other Corporation as Distributing or

Controlled, as appropriate). In addition, if Distributing or Controlled is

not directly engaged in an Active Business, submit the following REPRESENTATION:

Immediately after the distribution, at least 90 percent of the fair market value of the gross

assets of [insert the name of the corporation so indirectly engaged] will consist of the stock

and securities of controlled corporations that are engaged in the active conduct of a trade or

business as defined in § 355(b)(2). See section 3.04 of Rev. Proc. 77–37, 1977–2 C.B. 568,

570.

(6) Changes in ownership of an Active Business during the 5-year period ending on the

date of distribution. If an Active Business that is directly conducted by Distributing,

Controlled, or an Other Corporation has been acquired by that corporation during the 5-year

period ending on the date of distribution, identify the Active Business that was acquired and

provide the following information with respect to that Active Business:

(a) Identity. Identify the party from whom the business was acquired, and the transferor’s

relationship, if any, to Distributing or its shareholders.

(b) Date. State the date the business was acquired and the period of time the business had

been previously conducted by Distributing’s, Controlled’s, or Other Corporation’s predecessor

in interest.

was the business acquired in a reorganization under § 368(a)(1), by purchase, or by some

other means? If a letter ruling was issued with respect to the transaction, attach a copy.

(d) Consideration. State the consideration given in the acquisition.

(e) Gain or loss. State whether gain or loss was recognized, in whole or in part, to any

party to the transaction and whether the basis of the assets acquired was determined, in whole

or in part, by reference to the transferor’s basis.

(7) Stock ownership during the preceding 5-year period (see § 355(b)(2)(D)).

(a) Stock of Controlled or Other Corporations continuously owned during the preceding

5-year period. Identify Controlled and Other Corporations whose shares have been

continuously held by Distributing or Controlled for the 5-year period ending on the date of

distribution.

(b) Stock of Controlled or Other Corporations acquired by Distributing, Controlled, or

Other Corporations during the preceding 5-year period. If the stock of Controlled or Other

Corporations has been acquired by Distributing, Controlled, or Other Corporations during the

5-year period ending on the date of the distribution, identify the stock that was acquired and

provide the following information with respect to that stock:

(i) Identity. Identify the party from whom the stock was acquired and the transferor’s

relationship, if any, to Distributing or its shareholders.

(ii) Date and consideration. State the date the stock was acquired and the consideration

given in the acquisition.

(iii) Transaction. Describe the transaction in which the stock was acquired. For example,

was the stock acquired in a § 368(a)(1) reorganization, by purchase, or by some other means?

State whether control was acquired in a transaction in which Distributing transferred cash or

other liquid or inactive assets to Controlled. See section 4.01(31) of Rev. Proc. 96–3. If a

letter ruling was issued with respect to the transaction, attach a copy.

(iv) Gain or loss. State whether gain or loss was recognized, in whole or in part, to any

party to the transaction and whether the basis of the stock acquired was determined, in whole

or in part, by reference to the transferor’s basis.

ownership of the stock of Distributing, Controlled, or Other Corporations during the 5-year

period ending on the date of the distribution that is not fully described under section

4.03(7)(b) of this revenue procedure. For this purpose, a change of ownership includes, but is

not limited to, acquisitions, redemptions, recapitalizations, stock dividends, and sales.

Information regarding sales of stock to which the issuing corporation was not a party need not

be provided if: (i) the sale occurred on a recognized stock exchange or in an established

market; and (ii) both the purchaser and the seller held less than 5 percent of the corporation’s

stock both before and after the sale.

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Continuation of business

Business purpose (see

generally § 1.355–2(b))

Alternative transactions

Appendix A

Non-Corporate Business

Purposes

Shareholder planning

Special tax status

(8) Continuation of business. If the transaction involves the vertical division of a single

Active Business, submit the following REPRESENTATION: Following the transaction, the

distributing and controlled corporations will each continue, independently and with its

separate employees, the active conduct of its share of all the integrated activities of the

business conducted by the distributing corporation prior to consummation of the transaction.

If the transaction involves the separation of two or more Active Businesses, submit the

following REPRESENTATION: Following the transaction, the distributing and controlled

corporations will each continue the active conduct of its business, independently and with its

separate employees. Additionally, if, following the transaction, Distributing and Controlled

will share the services of any employees, identify these employees, specify the services to be

performed, the length of time the employees will be shared, the compensation arrangements,

and explain why the services of these employees will be shared.

In addition, describe any planned or intended substantial reduction in business activity for

any Active Business. Generally, a substantial reduction in business activity does not include a

vertical division of a single Active Business where Distributing and Controlled together

continue all of the integrated activities of the Active Business.

.04

(1) Detailed Description. Describe in detail each purpose (whether or not a corporate

business purpose) for the distribution of the stock of Controlled.

(2) Corporate Business Purposes. Explain which purposes described in section 4.04(1) of

this revenue procedure are corporate business purposes within the meaning of § 1.355–2(b)(2)

(‘‘Corporate Business Purposes’’). Describe how each Corporate Business Purpose is a real

and substantial nonfederal tax purpose germane to the business of Distributing, Controlled, or

the affiliated group (as defined in § 1.355–3(b)(4)(iv)) to which Distributing belongs. In

addition, explain the business exigencies that require the distribution at this time. Submit the

following REPRESENTATION: The distribution of the stock, or stock and securities, of the

controlled corporation is carried out for the following corporate business purposes: [list

these Corporate Business Purposes]. The distribution of the stock, or stock and securities, of

the controlled corporation is motivated, in whole or substantial part, by one or more of these

corporate business purposes.

(3) Alternative transactions. Explain why each Corporate Business Purpose cannot be

achieved through a nontaxable transaction that does not involve the distribution of stock of

Controlled and which is neither impractical nor unduly expensive. For example, in appropriate

cases, possible alternative transactions might include the transfer of assets to a partnership or

limited liability company. If a Corporate Business Purpose can be achieved through a

nontaxable alternative transaction that would be impractical or unduly expensive, fully

describe the reason the alternative transaction would be impractical or the additional expense

that would be incurred by using the alternative transaction instead of the proposed transaction.

An alternative transaction that will cause the loss of a favorable special tax status, such as an

existing S corporation election, will ordinarily be viewed as unduly expensive.

(4) Cross reference to Appendix A. Appendix A of this revenue procedure provides

guidelines that the Service will use, for ruling purposes, in evaluating whether a distribution

satisfies the corporate business purpose requirement in certain situations and specifies

information to be submitted with respect to the following business purposes: key employee,

stock offering, borrowing, cost savings, fit and focus, competition, facilitating an acquisition

of Distributing, facilitating an acquisition by Distributing or Controlled, and risk reduction.

The business purposes described in Appendix A of this revenue procedure are not an

exclusive list of Corporate Business Purposes for which the Service will issue a favorable

ruling. If a purpose for the transaction is not described in Appendix A of this revenue

procedure, the taxpayer should follow section 4.04 of this revenue procedure to establish that

the distribution satisfies the corporate business purpose requirement.

(5) Non-Corporate Business Purposes.

(a) General. If the transaction will enable Distributing, Controlled, or Other Corporations

to effect a reduction in federal taxes, or if it appears that the transaction will achieve one or

more other non-Corporate Business Purposes, the taxpayer must convince the Service by clear

and convincing evidence that the distribution is motivated in whole or substantial part by one

or more Corporate Business Purposes in order to obtain a favorable ruling.

(b) Shareholder planning. State whether a purpose for the distribution is to facilitate the

personal planning (such as estate planning or gifts) of any shareholder. If the answer is in the

affirmative, provide the details.

plans to become, will cease to be, or will become eligible to become an S corporation, real

estate investment trust, insurance company, bank, savings and loan, controlled foreign

corporation, or other corporation with a special federal tax status. If so, describe the special

tax status and the date it was or will become effective, will cease to be effective, or when the

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Description of any

reduction in federal taxes

Representation regarding

potential non-Corporate

Business Purpose

Substantiation

Third party documentation

Regulatory filings

Material prepared for

directors

Communications to

shareholders and

employees

Device (see generally

§ 1.355–(2)(d))

Purchases of stock by

Distributing or Controlled

corporation will become eligible. If either Distributing or Controlled will be eligible to elect S

corporation status after the distribution, see Appendix C.

(d) Reduction in federal taxes. Describe any reduction in federal taxes of Distributing,

Controlled, or any Other Corporations that can reasonably be expected to result from the

transaction. For this purpose, nonrecognition of income or gain to the shareholders or

corporation resulting from the application of § 355 or § 361 is disregarded.

(e) Representation. In order to lessen the Service’s concern about a potential nonCorporate Business Purpose, the taxpayer, in appropriate cases, may wish to represent that it

will engage in a specific course of action (such as making or not making an election) that

obviates the potential avoidance of federal taxes or other non-Corporate Business Purpose.

(6) Substantiation of business purpose.

(a) Documentation. The taxpayer must provide substantiation of one or more Corporate

Business Purposes that motivate the transaction in whole or substantial part. The type and

extent of the substantiation will necessarily vary depending on the described business purpose

and facts of the particular case. Accordingly, the taxpayer should submit documentation that

provides factual support for the Corporate Business Purposes. The Service recognizes that a

particular transaction may be undertaken for more than one Corporate Business Purpose.

Generally, satisfying the requirements of this section 4.04(6) of this revenue procedure with

respect to one Corporate Business Purpose that motivates the transaction, in substantial part,

will suffice in such cases.

(b) Third party documentation. If the transaction is being undertaken at the request of, or

pursuant to the advice or analysis of, persons other than Controlled or Distributing, explain

fully. Provide documentation of such third party requests, advice, or analysis to substantiate

the business purpose for the distribution. Such documentation should include an explanation

of the third party’s qualifications to speak to the matter.

Business purposes for which third party documentation may be necessary include, for

example, risk reduction, cost savings, facilitating a stock offering or borrowing, obtaining

regulatory relief, improving credit, and preserving a franchise. Third party documentation

prepared specifically for submission with the taxpayer’s ruling request must contain an

acknowledgement that the documentation will be submitted to the Internal Revenue Service

for use in determining the federal tax consequences of the transaction.

(7) Additional documents.

(a) Regulatory filings. Provide copies of any proxy statements, information statements, or

prospectuses filed or prepared in connection with the distribution or any related transaction.

List and briefly describe any other documents that have been or will be filed with (or

prepared for) any federal, state, local, or foreign regulatory body (such as the Securities and

Exchange Commission) by the taxpayer in connection with the distribution. The Service may

request copies of some or all such documents in the course of analyzing the ruling request.

(b) Material prepared for directors. Attach a copy of any materials that relate to the

purpose for the distribution and were prepared for or presented to the taxpayer’s board of

directors, and any relevant portions of the board’s minutes.

relating to the distribution. Attach copies of any letters or memoranda relating to the

distribution that the taxpayer or its officers sent to the taxpayer’s shareholders. In addition,

attach copies of the taxpayer’s written statements to its employees that discuss any purpose

for the distribution.

.05

(1) Dispositions of stock or securities.

(a) Representation. Submit the following REPRESENTATION: There is no plan or intention

by the shareholders or security holders of the distributing corporation to sell, exchange,

transfer by gift, or otherwise dispose of any of their stock in, or securities of, either the

distributing or controlled corporation after the transaction. For publicly traded companies,

the taxpayer may instead submit the following REPRESENTATION: There is no plan or

intention by any shareholder who owns 5 percent or more of the stock of the distributing

corporation, and the management of the distributing corporation, to its best knowledge, is not

aware of any plan or intention on the part of any particular remaining shareholder or

security holder of the distributing corporation to sell, exchange, transfer by gift, or otherwise

dispose of any stock in, or securities of, either the distributing or controlled corporation after

the transaction.

(b) Permitted purchases. For ruling purposes, the Service will treat purchases by either

Distributing or Controlled of its stock after the transaction as not violating the device

requirement of § 355(a)(1)(B) provided that:

(i) there is a sufficient business purpose for the stock purchase;

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Information regarding

planned dispositions of

stock or securities

Absence of earnings and

profits

Distribution qualifying as

an exchange

Investment assets

Liquidation or sale of

assets

Continuity of shareholder

interest (see generally

§ 1.355–2(c))

Disqualified distribution

(ii) the stock to be purchased is widely held;

(iii) the stock purchases will be made in the open market; and

(iv) there is no plan or intention that the aggregate amount of stock purchases will equal or

exceed 20 percent of the outstanding stock of the corporation.

Submit the following REPRESENTATION: There is no plan or intention by either the

distributing corporation or the controlled corporation, directly or through any subsidiary

corporation, to purchase any of its outstanding stock after the transaction, other than through

stock purchases meeting the requirements of section 4.05(1)(b) of Rev. Proc. 96–30.

If the stock purchases do not meet the requirements of this paragraph (b), the Service will

consider ruling on whether the purchases violate the device requirement of § 355(a)(1)(B)

after considering all of the facts and circumstances of each case.

meet the requirements of section 4.05(1)(b) of this revenue procedure), provide the following

information:

(i) Detailed description. Give complete details concerning the transaction, including any

agreements existing between the parties and the number of shares of each class of stock or

the amount of each series of securities that will be disposed of by each shareholder or

security holder.

(ii) Consideration. State the consideration to be received by each shareholder or security

holder.

(iii) Evidence of nondevice. Explain any special circumstances indicating why the

disposition should not be viewed as a device, such as proportionate sales of Distributing and

Controlled stock by the shareholder.

(2) Absence of earnings and profits. If the taxpayer contends that the distribution should

not be considered to be a device because of an absence of earnings and profits (see § 1.355–

2(d)(5)(ii)), submit the following REPRESENTATIONS:

(a) The distributing corporation and the controlled corporation have no accumulated

earnings and profits at the beginning of their respective taxable years;

(b) The distributing corporation and the controlled corporation will have no current

earnings and profits as of the date of the distribution;

transaction would require recognition of gain resulting in current earnings and profits for the

taxable year of the distribution; and

(d) The distributing corporation is not aware of, nor is the distributing corporation

planning or intending, any event that will result in the distributing corporation or the

controlled corporation having positive current or accumulated earnings and profits after the

distribution.

(3) Non pro rata distribution. State whether all or any part of the distribution, if considered

taxable, would qualify as an exchange under § 302(a) or § 303(a).

(4) Investment and inactive assets. Under a separate heading for each corporation, provide

the following information with respect to Distributing, Controlled, or Other Corporations:

(a) Detailed description. Provide a description and valuation of the investment assets, and

other assets that are not related to the reasonable needs of the Active Businesses of

Distributing, Controlled, or Other Corporations; and

(b) Explanation. Explain why Distributing, Controlled, or Other Corporations will hold

these assets.

(5) Liquidation or sale of assets. Submit the following REPRESENTATION: There is no plan

or intention to liquidate either the distributing or controlled corporation, to merge either

corporation with any other corporation, or to sell or otherwise dispose of the assets of either

corporation after the transaction, except in the ordinary course of business. Alternatively,

describe the subsequent transaction.

.06 The taxpayer must explain how the continuity of interest requirement will be satisfied.

Generally, the Service will view this requirement as satisfied if one or more persons who,

directly or indirectly, were the owners of the enterprise prior to the distribution own, in the

aggregate, 50 percent or more of the stock in each of the modified corporate forms in which

the enterprise is conducted after the separation. In appropriate cases, the Service may require

a continuity of interest representation from the taxpayer.

.07 Explain in detail why the distribution of Controlled stock, or of Controlled stock and

securities, will not be a disqualified distribution within the meaning of § 355(d)(2). Generally,

the explanation should set forth facts establishing that, taking into account the application of

§ 355(d)(6), (7), and (8), immediately after the distribution: (i) no person holds disqualified

stock in Distributing that constitutes a 50 percent or greater interest in Distributing; and (ii)

no person holds disqualified stock in Controlled that constitutes a 50 percent or greater

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Miscellaneous

Contributions to capital

Section 351

Liabilities

Investment credit

recapture representation

Matching of income and

deductions

Debt cancellation

Intercorporate

indebtedness

interest in Controlled. It is not necessary for the taxpayer to submit information accounting

for all of the stock of Distributing or Controlled if, by providing information with respect to a

smaller amount of stock, it can establish that the distribution will not be a disqualified

distribution.

.08

(1) Transfers and transactions between Distributing and Controlled.

(a) Contributions to capital. Provide complete details concerning any transfers of property

by Distributing to Controlled in anticipation of or in connection with the transaction. For

ruling purposes, such transfers ordinarily will be treated as occurring in connection with a

reorganization pursuant to § 368(a)(1)(D). If a transfer of property from Distributing to

Controlled will not qualify as a reorganization pursuant to § 368(a)(1)(D), and the taxpayer

contends that § 351 applies to the transaction, submit the information and representations

specified in Rev. Proc. 83–59, 1983–2 C.B. 575, as modified or superseded, or explain why

an item is not being submitted.

(b) Liabilities. If Controlled is assuming liabilities or receiving assets subject to liabilities,

submit the following REPRESENTATIONS:

(i) The total adjusted bases and the fair market value of the assets transferred to the

controlled corporation by the distributing corporation each equals or exceeds the sum of the

liabilities assumed by the controlled corporation plus any liabilities to which the transferred

assets are subject; and

(ii) The liabilities assumed in the transaction and the liabilities to which the transferred

assets are subject were incurred in the ordinary course of business and are associated with

the assets being transferred.

and Controlled, state whether any investment credit determined under § 46 has been (or will

be) claimed with respect to any of such property. If the answer is in the affirmative, submit

the following REPRESENTATION: The income tax liability for the taxable year in which

investment credit property (including any building to which § 47(d) applies) is transferred

will be adjusted pursuant to § 50(a)(1) or (a)(2) (or § 47, as in effect before amendment by

Public Law 101–508, Title 11, 104 Stat. 1388, 536 (1990), if applicable) to reflect an early

disposition of the property. Alternatively, explain why no increase in tax will be required

under § 50 (or § 47, as in effect before such amendment) as a result of the transaction.

(d) Matching of income and deductions. State the overall method of accounting of

Distributing and Controlled. Further, state whether the transaction involves or will result in a

situation in which one party recognizes income but another party recognizes the deductions

associated with such income or one party owns property but another party recognizes the

income associated with such property. See, for example, Notice 95–53, 1995–44 I.R.B. 21. If

one or more parties use the cash method of accounting, explain the extent to which any

actions have been or will be taken that are not in the ordinary course of business and that

might affect the timing or the amount of any income or deduction to be recognized by a cash

basis party to the transaction. See, for example, Rev. Rul. 80–198, 1980–2 C.B. 113. In

addition, submit a statement as to whether any income items, such as accounts receivable, or

any items resulting from a sale, exchange or disposition that would have resulted in income to

Distributing, or any items of expense, will be transferred to Controlled. If any of these items

are being transferred, fully explain. Further, submit the following REPRESENTATION: The

distributing corporation neither accumulated its receivables nor made extraordinary payment

of its payables in anticipation of the transaction. If Distributing uses the cash method of

accounting or a similar method and Controlled uses the accrual method or a similar method, a

closing agreement will be required unless the taxpayer submits the following REPRESENTATION: No income items, including accounts receivable or any item resulting from a sale,

exchange or disposition of property, that would have resulted in income to the distributing

corporation, and no items of expense will be transferred to the controlled corporation if the

distributing corporation has earned the right to receive the income or could claim a

deduction for the expense under the accrual or similar method of accounting.

(2) Indebtedness.

(a) Cancellation of indebtedness. If any indebtedness has been or will be cancelled in

connection with the transaction, give complete details concerning the principal amount of the

indebtedness, the circumstances under which it arose, and the date and method under which

the indebtedness will be discharged.

(b) Continuing indebtedness. Submit the following REPRESENTATION: No intercorporate

debt will exist between the distributing corporation and the controlled corporation at the time

of, or subsequent to, the distribution of the controlled corporation stock. Alternatively, submit

a full description of all existing, planned, or intended debt between Distributing and

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Consolidated transactions

Future intercorporate

transactions

Investment company

Consideration received by

Distributing

Foreign corporation

Other transactions

Plan of reorganization and