Rules and Regulations. Notice of proposed rulemaking
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BILLING CODE 4910-15-M 71 204 Monday, October 23, 2006 Proposed Rules NATIONAL AERONAUTICS AND SPACE ADMINISTRATION 14 CFR Part 1266 [Notice (06-079)] RIN 2700-AB51 Cross-Waiver of Liability AGENCY: National Aeronautics and Space Administration. ACTION: Notice of proposed rulemaking. SUMMARY: The National Aeronautics and Space Administration
(NASA)is proposing to amend part 1266 of Title 14 to update and ensure consistency in the use of cross-waiver of liability provisions in NASA agreements. Part 1266 provides the regulatory basis for cross-waiver provisions used in the following categories of NASA mission agreements: Agreements for activities in connection with the “Agreement Among the Government of Canada, Governments of Member States of the European Space Agency, the Government of Japan, the Government of the Russian Federation, and the Government of the United States of America concerning Cooperation on the Civil International Space Station” (commonly referred to as the ISS Intergovernmental Agreement, or IGA); agreements for use of the Space Shuttle; and agreements for NASA's science and space exploration missions that are launched on Expendable Launch Vehicles (ELVs). Among other generally clerical amendments to this Part, NASA is proposing to delete the subsection regarding the cross-waiver of liability during Space Shuttle operations and expand the scope of the ELV provision to encompass Reusable Launch Vehicles
(RLVs)as well as other users of the same launch vehicle during the same launch. *Comment Date:* Comments due on or before November 22, 2006. ADDRESSES: Federal eRulemaking Portal: *http://www.regulations.gov.* Follow the instructions for submitting comments. FOR FURTHER INFORMATION CONTACT: Steven A. Mirmina, Senior Attorney, Office of the General Counsel, NASA Headquarters, 300 E Street, SW., Washington, DC 20546; telephone: 202/358-2432; e-mail *steve.mirmina@nasa.gov.* SUPPLEMENTARY INFORMATION: In the 14 years since the current rule's publication (September 25, 1991), shifts in areas of NASA mission and program emphases warrant an adjustment of the NASA cross-waiver provisions to ensure they remain current. Most notably, on January 29, 1998, the United States formally joined with 14 nations in an international partnership in cooperative space exploration for the design, development, operation, and utilization of the International Space Station
(ISS)through the IGA. The IGA entered into force for NASA and various other Partners between 1998 and 2005. Article 16 of the IGA establishes a broad cross-waiver of liability among Partner States and their contractually or otherwise related entities by requiring those entities to make similar waivers of liability. Thus, NASA is required to include IGA-based cross-waivers in contracts and agreements for activities related to the ISS. A second development involves the February 1, 2003, Space Shuttle *Columbia* accident. In the wake of that tragedy, NASA embraced the recommendations of the Columbia Accident Investigation Board
(CAIB)that the NASA Space Transportation System (Shuttle) be used chiefly for completion of the ISS and then retired. While NASA is assessing the possibility of a servicing mission for the Hubble Space Telescope using the Shuttle, NASA does not expect to conclude any Space Act agreements with international partners for cooperation on this prospective mission. Since current servicing mission plans envision no other non-ISS missions, there is no longer a need to retain the section of part 1266 regarding a separate cross-waiver of liability to be used during Shuttle operations (formerly § 1266.103), and NASA is proposing to delete it. Third, NASA has continued to conduct scores of missions for the purpose of furthering science and space exploration unrelated to the ISS and without using the Shuttle. These missions are currently launched using ELVs and Evolved Expendable Launch Vehicles (EELVs). NASA anticipates that missions of this nature may also be launched using commercially available RLVs. Thus, NASA is expanding the scope of the current ELV section to include RLVs as well. NASA has an established practice of including cross-waivers in its mission agreements to lower the risks and costs of space exploration. Revising the present regulation is intended to promote consistency between the general types of cross-waivers NASA uses in its agreement practice for ISS activities and other scientific missions launched by commercial vehicles. Additionally, since commercial launch providers can launch multiple payloads on the same vehicle, NASA is proposing to expand the scope of the waiver in § 1266.104 to include other users of a single launch vehicle. 1 1 The provisions of this Regulation will be applicable only to NASA launches that are not licensed by the Federal Aviation Administration (FAA). The FAA licenses launch vehicles and reentry of reentry vehicles under authority granted to the Secretary of Transportation in the Commercial Space Launch Act
(CSLA)of 1984, as amended, codified in 49 U.S.C. Subtitle IX, chapter 701, and delegated to the FAA Administrator. Licensing authority under the CSLA is carried out by FAA Associate Administrator for Commercial Space Transportation. Where NASA acquires launch services on a commercial basis (such as through contracts for spacecraft delivery on-orbit) the cross-waiver provisions of the CSLA will apply. Fourth, NASA has had a long history and consistent practice of requiring international and domestic partners to cross-waive claims for loss or damage and, thus, assume responsibility for the risks inherent in space exploration. For years, NASA has utilized broad, no-fault, no subrogation cross-waivers. In response to questions raised by the U.S. Department of Justice in 1995 regarding the Agency's authority to waive claims of the U.S. Government, and at NASA's request, President Clinton underscored successive Administrations' acknowledgement of the importance of these liability arrangements by affirming, through a delegation of his constitutional foreign affairs authority, NASA's authority to enter into cross-waivers of liability, on behalf of the Government of the United States, with its Partners in international agreements. In part, the President's delegation provided: The authority conferred upon the President by the Constitution and the laws of the United States of America to execute mutual waivers of claims of liability on behalf of the United States for damages arising out of cooperative activities is hereby delegated to the Administrator of NASA for agreements with foreign governments and their agents regarding aeronautical, science, and space activities that are executed pursuant to the authority granted NASA by the National Aeronautics and Space Act of 1958, Public Law 85-568, as amended. 2 2 Presidential Documents, Memorandum of October 10, 1995, Delegation of Authority to Enter into Mutual Waivers of Liability for Certain Agreements Under the National Aeronautics and Space Act of 1958, 60 FR 53251, October 13, 1995. However, this delegation of cross-waiver authority for cooperative agreements with foreign entities left unresolved the extent of NASA's authority to execute similar waivers of U.S. Government claims against the Agency's U.S. cooperative partners, such as corporations and universities. Therefore, NASA sought statutory confirmation and clarification of NASA's authority to implement liability cross-waivers with both domestic and international partners. Congress responded by amending the National Aeronautics and Space Act of 1958 (Space Act) to include Section 309. 3 Specifically, this section, codified at 42 U.S.C. 2458c, confirms and clarifies NASA's authority to waive claims of the U.S. Government in cooperative agreements in exchange for a reciprocal waiver of claims from the cooperating party. In situations where, for example, a foreign space agency lacks fully reciprocal authority to waive claims of its government, special arrangements have been developed to cover the gap, including the requirement to purchase insurance to protect NASA against broader claims of a foreign government that a foreign space agency is unable to waive. A prime example of such arrangements is set forth in Article 16 of the IGA to address potential subrogated claims of the Japanese Government. 3 The provisions of Section 309 were recently extended in the NASA Authorization Act of 2005, Pub. L. 109-155, which was signed by President Bush on December 30, 2005. Use of Cross-Waivers for ISS and ELV/RLV Activities: The fundamental purpose of cross-waivers of liability in NASA agreements is to encourage participation in the exploration, exploitation, and use of outer space. The IGA declares the Partner States' intention that cross-waivers of liability be broadly construed to achieve this purpose. It is important to underscore the fact that agreements for high-risk activities of very broad and diffuse scope require that both entities be involved in “Protected Space Operations” or “PSO.” PSO is defined to include a wide range of design, transport, flight, and payload activities. In addition, for many of these higher-risk activities as well as for any activity requiring a significant amount of contractor involvement, NASA typically insists that each party require its own related entities (e.g. contractors, subcontractors, users, and customers, at any tier) to agree to waive claims against similar entities that may be legally related to any other party. This is referred to as the “flow down” requirement of the cross-waiver. The chief differences between the ISS and ELV cross-waivers lie in the broad scope of the ISS activities required to be covered by cross-waivers in contrast with the more limited scope of waivers used for most mission-specific science and space exploration activities. To illustrate, the cross-waiver for ISS activities generally is in effect anywhere in the world when activities are conducted in implementation of any ISS-related agreement. The ELV-based cross-waiver is more limited; it generally is only applied to the parties to an agreement and their related entities, although it is being expanded by this proposed rule to cover other payloads launched on the same vehicle. In essence, however, the operation of the ISS and ELV waivers is comparable; both the party claiming damage and the party causing damage must be participating in “Protected Space Operations”. More specifically, the term “Protected Space Operations” in the IGA cross-waiver includes all activities in implementation of the IGA or Memoranda of Understanding concluded pursuant to the IGA. In contrast, the term “Protected Space Operations” in NASA's science and space exploration agreements covers all ELV or RLV activities that are performed in implementation of an agreement for launch services. The specific requirements and precise scope of the term “Protected Space Operations” are provided in §§ 1266.102 and 1266.104. The other changes accomplished in this revision are minor, making uniform the capitalization, use of italics, ordering of listed terms, and general editorial changes to the cross-waiver regulation. *General:* This part establishes the regulatory basis for cross-waivers incorporated in NASA agreements implementing the IGA as well as for cooperative ELV or RLV missions that do not involve ISS activities. In addition, this part provides the regulatory basis for NASA to flow down the obligations of these cross-waivers of liability to its related entities through contracts issued pursuant to its mission agreements. To be made fully effective, the cross-waivers required by this part will necessitate concomitant changes to NASA procurement regulations. NASA plans to implement these changes as expeditiously as possible after this proposed rule becomes final. This regulation is not a significant regulatory action for purposes of Executive Order 12866, “Regulatory Planning and Review”. As required by the Regulatory Flexibility Act, NASA certifies that these amendments will not have a significant impact on small business entities. List of Subjects in 14 CFR Part 1266 Cross-waiver, Evolved expendable launch vehicle, Expendable launch vehicle, Intergovernmental agreement, International Space Station, Liability, Reusable launch vehicle, Space shuttle, Space transportation and exploration. For the reasons stated in the preamble, NASA proposes to revise 14 CFR part 1266 as follows: PART 1266—CROSS-WAIVER OF LIABILITY Sec. 1266.100 Purpose. 1266.101 Scope. 1266.102 Cross-waiver of liability for agreements involving activities related to the International Space Station (ISS). 1266.103 [Reserved]. 1266.104 Cross-waiver of liability for science and space exploration agreements for missions launched by Expendable Launch Vehicles or Reusable Launch Vehicles. Authority: 42 U.S.C. 2473 (c)(1), (c)(5) and 42 U.S.C. 2458c. § 1266.100 Purpose. The purpose of this regulation is to ensure that consistent cross-waivers of liability are included in NASA agreements for activities related to the ISS and for NASA's other activities of scientific space exploration that do not involve activities in connection with the ISS, whether launched by Expendable Launch Vehicle
(ELV)or Reusable Launch Vehicle (RLV). § 1266.101 Scope. The provisions at § 1266.102 are intended to implement the cross-waiver requirement in Article 16 of the intergovernmental agreement entitled, “Agreement Among the Government of Canada, Governments of Member States of the European Space Agency, the Government of Japan, the Government of the Russian Federation, and the Government of the United States of America concerning Cooperation on the Civil International Space Station (IGA)”. Article 16 establishes a cross-waiver of liability for use by the Partner States and their related entities and requires that this reciprocal waiver of claims be extended to contractually or otherwise related entities of NASA by requiring those entities to make similar waivers of liability. Thus, NASA is required to include IGA-based cross-waivers in contracts and agreements for ISS activities that fall within the scope of “Protected Space Operations,” as that term is defined in § 1266.102. The purpose of the waiver is to encourage participation in the “exploration, exploitation, and use of outer space” through the ISS. The IGA declares the Partner States' intention that this cross-waiver of liability be broadly construed to achieve this purpose. NASA incorporates the provisions of § 1266.102 into its agreements for activities that implement the IGA and the memoranda of understanding between the United States and its respective international partners. The provisions at § 1266.104 of this part provide the regulatory basis for cross-waiver clauses to be incorporated in NASA's science and space exploration agreements that do not involve activities in connection with the ISS and are launched by either ELVs or RLVs. § 1266.102 Cross-waiver of liability for agreements involving activities related to the International Space Station (ISS).
(a)The objective of this section is to implement NASA's responsibility to flow down the cross-waiver of liability in Article 16 of the IGA to its related entities in the interest of encouraging participation in the exploration, exploitation, and use of outer space through the ISS. It is intended that the cross-waiver of liability be broadly construed to achieve this objective. Provided that the waiver of claims is reciprocal, the parties may tailor the scope of the cross-waiver clause in these agreements to address the specific circumstances of a particular cooperation.
(b)For the purposes of this section:
(1)The term “Partner State” includes each contracting party for which the Agreement Among The Government of Canada, Governments of Member States of the European Space Agency, the Government of Japan, the Government of the Russian Federation, and the Government of the United States of America Concerning Cooperation on the Civil International Space Station (signed January 29, 1998; hereinafter the “Intergovernmental Agreement”) has entered into force or become operative (pursuant to Sections 25 and 26, respectively, of the Intergovernmental Agreement), or any successor agreement. A Partner State includes its Cooperating Agency. It also includes any entity specified in the MOU between NASA and the Government of Japan to assist the Government of Japan's Cooperating Agency in the implementation of that MOU.
(2)The term “related entity” means:
(i)A contractor or subcontractor of a Party or a Partner State at any tier;
(ii)A user or customer of a Party or a Partner State at any tier; or
(iii)A contractor or subcontractor of a user or customer of a Party or a Partner State at any tier. The term “related entity” may also apply to a State, or an agency or institution of a State, having the same relationship to a Partner State as described in paragraphs (b)(2)(i) through (b)(2)(iii) of this section or otherwise engaged in the implementation of Protected Space Operations as defined in paragraph
(b)(3)(vi) of this section. The terms “contractors” and “subcontractors” include suppliers of any kind.
(3)The term “damage” means:
(i)Bodily injury to, or other impairment of health of, or death of, any person;
(ii)Damage to, loss of, or loss of use of any property;
(iii)Loss of revenue or profits; or
(iv)Other direct, indirect or consequential damage.
(4)The term “launch vehicle” means an object or any part thereof intended for launch, launched from Earth, or returning to Earth which carries payloads or persons, or both.
(5)The term “payload” means all property to be flown or used on or in a launch vehicle or the ISS.
(6)The term “Protected Space Operations” means all launch vehicle activities, ISS activities, and payload activities on Earth, in outer space, or in transit between Earth and outer space in implementation of the IGA, MOUs concluded pursuant to the IGA, and implementing arrangements. It includes, but is not limited to:
(i)Research, design, development, test, manufacture, assembly, integration, operation, or use of launch or transfer vehicles, the ISS, payloads, or instruments, as well as related support equipment and facilities and services; and
(ii)All activities related to ground support, test, training, simulation, or guidance and control equipment and related facilities or services. “Protected Space Operations” also includes all activities related to evolution of the ISS, as provided for in Article 14 of the IGA. “Protected Space Operations” excludes activities on Earth which are conducted on return from the ISS to develop further a payload's product or process for use other than for ISS-related activities in implementation of the IGA. (c)(1) Cross-waiver of liability: Each Party agrees to a cross-waiver of liability pursuant to which each Party waives all claims against any of the entities or persons listed in paragraphs (c)(1)(i) through (c)(1)(iv) of this section based on damage arising out of Protected Space Operations. This cross-waiver shall apply only if the person, entity, or property causing the damage is involved in Protected Space Operations and the person, entity, or property damaged is damaged by virtue of its involvement in Protected Space Operations. The cross-waiver shall apply to any claims for damage, whatever the legal basis for such claims against:
(i)Another Party;
(ii)A Partner State other than the United States of America;
(iii)A related entity of any entity identified in paragraph (c)(1)(i) or (c)(1)(ii) of this section; or
(iv)The employees of any of the entities identified in paragraphs (c)(1)(i) through (c)(1)(iii) of this section.
(2)In addition, each Party shall, by contract or otherwise, extend the cross-waiver of liability as set forth in paragraph (c)(1) of this section to its related entities by requiring them, by contract or otherwise, to:
(i)Waive all claims against the entities or persons identified in paragraphs (c)(1)(i) through (c)(1)(iv) of this section; and
(ii)Require that their related entities waive all claims against the entities or persons identified in paragraphs (c)(1)(i) through (c)(1)(iv) of this section.
(3)For avoidance of doubt, this cross-waiver of liability includes a cross-waiver of claims arising from the Convention on International Liability for Damage Caused by Space Objects, which entered into force on September 1, 1972, where the person, entity, or property causing the damage is involved in Protected Space Operations and the person, entity, or property damaged is damaged by virtue of its involvement in Protected Space Operations.
(4)Notwithstanding the other provisions of this section, this cross-waiver of liability shall not be applicable to:
(i)Claims between a Party and its own related entity or between its own related entities;
(ii)Claims made by a natural person, his/her estate, survivors or subrogees (except when a subrogee is a Party to this Agreement or is otherwise bound by the terms of this cross-waiver) for bodily injury to, or other impairment of health of, or death of such person;
(iii)Claims for damage caused by willful misconduct;
(iv)Intellectual property claims;
(v)Claims for damage resulting from a failure of a Party to extend the cross-waiver of liability to its related entities, pursuant to paragraph (c)(2) of this section; or
(vi)Claims by or against a Party arising out of or relating to the other Party's failure to meet its contractual obligations set forth in the Agreement.
(5)Nothing in this section shall be construed to create the basis for a claim or suit where none would otherwise exist.
(6)This cross-waiver shall not be applicable when the Commercial Space Launch Act cross-waiver (49 U.S.C. 70101 *et seq.* ) is applicable. § 1266.103 [Reserved]. § 1266.104 Cross-waiver of liability for science and space exploration agreements for missions launched by Expendable Launch Vehicles or Reusable Launch Vehicles.
(a)The purpose of this section is to implement a cross-waiver of liability between the parties to agreements for NASA's science and space exploration missions launched by an Expendable Launch Vehicle
(ELV)or Reusable Launch Vehicle
(RLV)when those missions do not involve activities in connection with the International Space Station (ISS). This comprehensive cross-waiver of liability is intended to apply both between the parties to those agreements as well as to the parties' related entities, in the interest of furthering participation in space exploration, use, and investment. It is intended that the cross-waiver of liability be broadly construed to achieve this objective. Provided that the waiver of claims is reciprocal, the parties may tailor the scope of the cross-waiver clause in these agreements to address the specific circumstances of a particular cooperation.
(b)For purposes of this section:
(1)The term “Party” means a party to a NASA agreement involving a launch of an ELV or RLV not involving activities in connection with the ISS.
(2)The term “related entity” means:
(i)A contractor or subcontractor of a Party at any tier;
(ii)A user or customer of a Party at any tier; or
(iii)A contractor or subcontractor of a user or customer of a Party at any tier. The term “related entity” may also apply to a State or an agency or institution of a State, having the same relationship to a Party as described in paragraphs (b)(2)(i) through (b)(2)(iii) of this section, or otherwise engaged in the implementation of Protected Space Operations as defined in paragraph (b)(6) of this section. The terms “contractors” and “subcontractors” include suppliers of any kind.
(3)The term “damage” means:
(i)Bodily injury to, or other impairment of health of, or death of, any person;
(ii)Damage to, loss of, or loss of use of any property;
(iii)Loss of revenue or profits; or
(iv)Other direct, indirect, or consequential damage.
(4)The term “launch vehicle” means an object or any part thereof intended for launch, launched from Earth, or returning to Earth which carries payloads or persons, or both.
(5)The term “payload” means all property to be flown or used on or in a launch vehicle.
(6)The term “Protected Space Operations” means all ELV or RLV activities and payload activities on Earth, in outer space, or in transit between Earth and outer space in implementation of an agreement for launch services. It includes, but is not limited to:
(i)Research, design, development, test, manufacture, assembly, integration, operation, or use of launch or transfer vehicles, payloads, or instruments, as well as related support equipment and facilities and services; and
(ii)All activities related to ground support, test, training, simulation, or guidance and control equipment and related facilities or services. The term “Protected Space Operations” excludes activities on Earth that are conducted on return from space to develop further a payload's product or process for use other than for the activities within the scope of an Agreement for launch services.
(c)Cross-waiver of liability:
(1)Each Party agrees to a cross-waiver of liability pursuant to which each Party waives all claims against any of the entities or persons listed in paragraphs (c)(1)(i) through (c)(1)(iv) of this section based on damage arising out of Protected Space Operations. This cross-waiver shall apply only if the person, entity, or property causing the damage is involved in Protected Space Operations and the person, entity, or property damaged is damaged by virtue of its involvement in Protected Space Operations. The cross-waiver shall apply to any claims for damage against:
(i)Another Party;
(ii)A party to another NASA agreement that includes flight on the same launch vehicle;
(iii)A related entity of any entity identified in paragraphs (c)(1)(i) or (c)(1)(ii) of this section; or
(iv)The employees of any of the entities identified in paragraphs (c)(1)(i) through (c)(1)(iii) of this section.
(2)In addition, each Party shall extend the cross-waiver of liability as set forth in paragraph (c)(1) of this section to its own related entities by requiring them, by contract or otherwise, to:
(i)Waive all claims against the entities or persons identified in paragraphs (c)(1)(i) through (c)(1)(iv) of this section; and
(ii)Require that their related entities waive all claims against the entities or persons identified in paragraphs (c)(1)(i) through (c)(1)(iv) of this section.
(3)For avoidance of doubt, this cross-waiver of liability includes a cross-waiver of claims arising from the Convention on International Liability for Damage Caused by Space Objects, which entered into force on September 1, 1972, where the person, entity, or property causing the damage is involved in Protected Space Operations and the person, entity, or property damaged is damaged by virtue of its involvement in Protected Space Operations.
(4)Notwithstanding the other provisions of this section, this cross-waiver of liability shall not be applicable to:
(i)Claims between a Party and its own related entity or between its own related entities;
(ii)Claims made by a natural person, his/her estate, survivors, or subrogees (except when a subrogee is a Party to this Agreement or is otherwise bound by the terms of this cross-waiver) for bodily injury to, or other impairment of health of, or death of such natural person;
(iii)Claims for damage caused by willful misconduct;
(iv)Intellectual property claims;
(v)Claims for damages resulting from a failure of a Party to extend the cross-waiver of liability to its related entities, pursuant to paragraph (c)(2) of this section; or
(vi)Claims by or against a Party arising out of or relating to the other Party's failure to meet its contractual obligations set forth in the Agreement.
(5)Nothing in this section shall be construed to create the basis for a claim or suit where none would otherwise exist.
(6)This cross-waiver shall not be applicable when the Commercial Space Launch Act cross-waiver (49 U.S.C. 70101 *et seq.* ) is applicable. Michael D. Griffin, Administrator. [FR Doc. E6-17701 Filed 10-20-06; 8:45 am] BILLING CODE 7510-13-P DEPARTMENT OF COMMERCE Bureau of Industry and Security 15 CFR Chapter VII [Docket No. 061010262-6262-01] Effectiveness of Licensing Procedures for Agricultural Commodities to Cuba AGENCY: Bureau of Industry and Security, Commerce. ACTION: Request for comments. SUMMARY: The Bureau of Industry and Security
(BIS)is requesting public comments on the effectiveness of its licensing procedures as defined in the Export Administration Regulations for the export of agricultural commodities to Cuba. BIS will include a description of these comments in its biennial report to the Congress, as required by the Trade Sanctions Reform and Export Enhancement Act of 2000 (Pub. L. 106-387), as amended. DATES: Comments must be received by November 22, 2006. ADDRESSES: Written comments (three copies) should be sent to Regulatory Policy Division, Bureau of Industry and Security, U.S. Department of Commerce, Room 2705, Washington, DC 20230 with a reference to TSRA 2006 Report, or to e-mail *publiccomments@bis.doc.gov* with a reference to TSRA 2006 Report in the subject line. Comments may also be emailed to Joan Roberts, Office of Nonproliferation and Treaty Compliance, at *JRoberts@bis.doc.gov.* FOR FURTHER INFORMATION CONTACT: Joan Roberts, Office of Nonproliferation and Treaty Compliance, Telephone:
(202)482-4252. Additional information on BIS procedures and our previous biennial report under the Trade Sanctions Reform and Export Enhancement Act, as amended, is available at *http://www.bis.doc.gov/licensing/TSRA_TOC.html.* Copies of these materials may also be requested by contacting the Office of Nonproliferation and Treaty Compliance. Copies of the public record concerning these regulations may be requested from: Bureau of Industry and Security, Office of Administration, U.S. Department of Commerce, Room 6883, 1401 Constitution Avenue, NW., Washington, DC 20230;
(202)482-2165. The Office of Administration displays these public comments on BIS's Freedom of Information Act
(FOIA)Web site at *http://www.bis.doc.gov/foia.* This office does not maintain a separate public inspection facility. If you have technical difficulties accessing this Web site, please call BIS's Office of Administration at
(202)482-2165 for assistance. SUPPLEMENTARY INFORMATION: The Bureau of Industry and Security
(BIS)authorizes exports of agricultural commodities to Cuba pursuant to section 906(c) of the Trade Sanctions Reform and Export Enhancement Act of 2000
(TSRA)(22 U.S.C. 7205(a)), under the procedures set forth in § 740.18 of the Export Administration Regulations
(EAR)(15 CFR 740.18). These are the only licensing procedures currently in effect pursuant to the requirements of section 906(a) of TSRA. Please include the phrase TSRA 2006 on the envelope or in the subject line of the email as appropriate. Under the provisions of section 906(c) of TSRA (22 U.S.C. 7205(c)), BIS must submit a biennial report to the Congress on the operation of the licensing system implemented pursuant to section 906(a) for the preceding two-year period. This report is to include the number and types of licenses applied for, the number and types of licenses approved, the average amount of time elapsed from the date of filing of a license application until the date of its approval, the extent to which the licensing procedures were effectively implemented, and a description of comments received from interested parties during a 30-day public comment period about the effectiveness of the licensing procedures. BIS is currently preparing a biennial report on the operation of the licensing system for the two-year period from October 1, 2004 to September 30, 2006. By this notice, BIS requests public comments on the effectiveness of the licensing procedures for the export of agricultural commodities to Cuba set forth under § 740.18 of the EAR. Parties submitting comments are asked to be as specific as possible. All comments received by the close of the comment period will be considered by BIS in developing the report to Congress. All information relating to the notice will be a matter of public record and will be available for public inspection and copying. In the interest of accuracy and completeness, BIS requires written comments. Copies of the public record concerning these regulations may be requested from: Bureau of Industry and Security, Office of Administration, U.S. Department of Commerce, Room 6883, 1401 Constitution Avenue, NW., Washington, DC 20230;
(202)482-2165. The Office of Administration displays these public comments on BIS's Freedom of Information Act
(FOIA)Web site at *http://www.bis.doc.gov/foia.* This office does not maintain a separate public inspection facility. If you have technical difficulties accessing this Web site, please call BIS's Office of Administration at
(202)482-2165 for assistance. Dated: October 17, 2006. Christopher A. Padilla, Assistant Secretary for Export Administration. [FR Doc. E6-17707 Filed 10-20-06; 8:45 am] BILLING CODE 3510-33-P DEPARTMENT OF COMMERCE Bureau of Industry and Security 15 CFR Chapter VII [Docket No. 061005255-6255-01] Effects of Foreign Policy-Based Export Controls AGENCY: Bureau of Industry and Security, Commerce. ACTION: Request for comments on foreign policy-based export controls. SUMMARY: The Bureau of Industry and Security
(BIS)is reviewing the foreign policy-based export controls in the Export Administration Regulations to determine whether they should be modified, rescinded or extended. To help make these determinations, BIS is seeking comments on how existing foreign policy-based export controls have affected exporters and the general public. DATES: Comments must be received by November 22, 2006. ADDRESSES: Written comments may be sent by e-mail to *publiccomments@bis.doc.gov.* Include “FPBEC” in the subject line of the message. Written comments (three copies) may be submitted by mail or hand delivery to Sheila Quarterman, Regulatory Policy Division, Bureau of Industry and Security, Department of Commerce, 14th Street & Pennsylvania Avenue, NW., Room 2705, Washington, DC 20230. Include “FPBEC” in the subject line of the message. FOR FURTHER INFORMATION CONTACT: Joan Roberts, Director, Foreign Policy Division, Office of Nonproliferation and Treaty Compliance, Bureau of Industry and Security, Telephone:
(202)482-4252. Copies of the current Annual Foreign Policy Report to the Congress are available at *http://www.bis.doc.gov/News/2006/foreignPolicyReport/Default.htm* and copies may also be requested by calling the Office of Nonproliferation and Treaty Compliance at the number listed above. SUPPLEMENTARY INFORMATION: Foreign policy-based controls in the Export Administration Regulations
(EAR)are implemented pursuant to section 6 of the Export Administration Act of 1979, as amended. The current foreign policy-based export controls maintained by the Bureau of Industry and Security
(BIS)are set forth in the EAR, including in parts 742 (CCL Based Controls), 744 (End-User and End-Use Based Controls) and 746 (Embargoes and Special Country Controls). These controls apply to a range of countries, items, activities and persons, including: certain general purpose microprocessors for ‘military end-uses’ and ‘military end-users’ (§ 744.17); significant items (SI): hot section technology for the development, production, or overhaul of commercial aircraft engines, components, and systems (§ 742.14); encryption items (§§ 742.15 and 744.9); crime control and detection commodities (§ 742.7); specially designed implements of torture (§ 742.11); certain firearms included within the Inter-American Convention Against the Illicit Manufacturing of and Trafficking in Firearms, Ammunition, Explosives, and Other Related Materials (§ 742.17); regional stability items (§ 742.6); equipment and related technical data used in the design, development, production, or use of certain rocket systems and unmanned air vehicles (§§ 742.5 and 744.3); chemical precursors and biological agents, associated equipment, technical data, and software related to the production of chemical and biological agents (§§ 742.2 and 744.4) and various chemicals included in those controlled pursuant to the Chemical Weapons Convention (§ 742.18); nuclear propulsion (§ 744.5); aircraft and vessels (§ 744.7); embargoed countries (part 746); countries designated as supporters of acts of international terrorism (§§ 742.8, 742.9, 742.10, 742.19, 746.2, and 746.7); certain entities in Russia (§ 744.10); individual terrorists and terrorist organizations (§§ 744.12, 744.13 and 744.14); certain persons designated by Executive Order 13315 (“Blocking Property of the Former Iraqi Regime, Its Senior Officials and Their Family Members”) (§ 744.18); and certain sanctioned entities (§ 744.20). Attention is also given in this context to the controls on nuclear-related commodities and technology (§§ 742.3 and 744.2), which are, in part, implemented under section 309(c) of the Nuclear Non Proliferation Act. Under the provisions of section 6 of the Export Administration Act of 1979, as amended (50 U.S.C. app. §§ 2401-2420 (2000)) (EAA), export controls maintained for foreign policy purposes require annual extension. Section 6 of the EAA requires a report to Congress when foreign policy-based export controls are extended. The EAA expired on August 20, 2001. Executive Order 13222 of August 17, 2001 (3 CFR, 2001 Comp., p. 783 (2002)), which has been extended by successive Presidential Notices, the most recent being that of August 3, 2006 (71 FR 44551, August 7, 2006), continues the EAR and, to the extent permitted by law, the provisions of the EAA, in effect under the International Emergency Economic Powers Act (50 U.S.C. 1701-1706 (2000)). The Department of Commerce, insofar as appropriate, is following the provisions of section 6 in reviewing foreign policy-based export controls, requesting public comments on such controls, and submitting a report to Congress. In January 2006, the Secretary of Commerce, on the recommendation of the Secretary of State, extended for one year all foreign policy-based export controls then in effect. To assure public participation in the review process, comments are solicited on the extension or revision of the existing foreign policy-based export controls for another year. Among the criteria considered in determining whether to continue or revise U.S. foreign policy-based export controls are the following: 1. The likelihood that such controls will achieve the intended foreign policy purpose, in light of other factors, including the availability from other countries of the goods, software or technology proposed for such controls; 2. Whether the foreign policy purpose of such controls can be achieved through negotiations or other alternative means; 3. The compatibility of the controls with the foreign policy objectives of the United States and with overall United States policy toward the country subject to the controls; 4. Whether reaction of other countries to the extension of such controls by the United States is not likely to render the controls ineffective in achieving the intended foreign policy purpose or be counterproductive to United States foreign policy interests; 5. The comparative benefits to U.S. foreign policy objectives versus the effect of the controls on the export performance of the United States, the competitive position of the United States in the international economy, the international reputation of the United States as a supplier of goods and technology; and 6. The ability of the United States to enforce the controls effectively. BIS is particularly interested in receiving comments on the economic impact of proliferation controls. BIS is also interested in industry information relating to the following: 1. Information on the effect of foreign policy-based export controls on sales of U.S. products to third countries (i.e., those countries not targeted by sanctions), including the views of foreign purchasers or prospective customers regarding U.S. foreign policy-based export controls. 2. Information on controls maintained by U.S. trade partners. For example, to what extent do they have similar controls on goods and technology on a worldwide basis or to specific destinations? 3. Information on licensing policies or practices by our foreign trade partners which are similar to U.S. foreign policy-based export controls, including license review criteria, use of conditions, requirements for pre- and post-shipment verifications (preferably supported by examples of approvals, denials and foreign regulations). 4. Suggestions for revisions to foreign policy-based export controls that would (if there are any differences) bring them more into line with multilateral practice. 5. Comments or suggestions as to actions that would make multilateral controls more effective. 6. Information that illustrates the effect of foreign policy-based export controls on the trade or acquisitions by intended targets of the controls. 7. Data or other information as to the effect of foreign policy-based export controls on overall trade at the level of individual industrial sectors. 8. Suggestions as to how to measure the effect of foreign policy-based export controls on trade. 9. Information on the use of foreign policy-based export controls on targeted countries, entities, or individuals. BIS is also interested in comments relating generally to the extension or revision of existing foreign policy-based export controls. Parties submitting comments are asked to be as specific as possible. All comments received before the close of the comment period will be considered by BIS in reviewing the controls and developing the report to Congress. All information relating to the notice will be a matter of public record and will be available for public inspection and copying. In the interest of accuracy and completeness, BIS requires written comments. Oral comments must be followed by written memoranda, which will also be a matter of public record and will be available for public review and copying. The Office of Administration, Bureau of Industry and Security, U.S. Department of Commerce, displays these public comments on BIS's Freedom of Information Act
(FOIA)Web site at *http://www.bis.doc.gov/foia.* This office does not maintain a separate public inspection facility. If you have technical difficulties accessing this Web site, please call BIS's Office of Administration at
(202)482-0637 for assistance. Dated: October 12, 2006. Christopher A. Padilla, Assistant Secretary for Export Administration. [FR Doc. E6-17713 Filed 10-20-06; 8:45 am] BILLING CODE 3510-33-P DEPARTMENT OF THE TREASURY Internal Revenue Service 26 CFR Part 1 [REG-110405-05] RIN 1545-BE58 Limitations on Transfers of Built-in Losses AGENCY: Internal Revenue Service (IRS), Treasury. ACTION: Notice of proposed rulemaking. SUMMARY: This document contains proposed regulations under section 362(e)(2) of the Internal Revenue Code of 1986 (Code). The proposed regulations reflect changes made to the law by the American Jobs Creation Act of 2004. These proposed regulations provide guidance regarding the determination of the bases of assets and stock transferred in certain nonrecognition transactions and will affect corporations and large shareholders of corporations, including individuals, partnerships, corporations, and tax-exempt entities. DATES: Written or electronic comments and requests for a public hearing must be received by January 22, 2007. ADDRESSES: Send submissions to CC:PA:LPD:PR (REG-110405-05), Internal Revenue Service, PO Box 7604, Ben Franklin Station, Washington, DC 20044. Submissions may be hand delivered to CC:PA:LPD:PR (REG-110405-05), Courier's Desk, Internal Revenue Service, Crystal Mall 4 Building, 1901 S. Bell St., Arlington, VA. Alternatively, taxpayers may submit comments electronically directly to the IRS Internet site at *www.irs.gov/regs* or Federal e-Rulemaking Portal at *www.regulations.gov* (IRS REG-110405-05). FOR FURTHER INFORMATION CONTACT: Concerning the proposed regulations, Jay M. Singer,
(202)622-7530 (not toll-free number), or concerning submissions of comments, Richard A. Hurst, *Richard.A.Hurst@irscounsel.treas.gov.* SUPPLEMENTARY INFORMATION: Background Prior to 1999, Congress grew concerned that taxpayers were engaging in corporate nonrecognition transactions in order to accelerate and duplicate losses. See S. Rep. No. 201, 106th Cong., 1st Sess. 46-48 (1999). Congress was primarily concerned with the acceleration and duplication of losses through the assumption of liabilities (including liabilities to which assets transferred in a corporate nonrecognition transaction were subject). As a result, in 1999, Congress enacted section 362(d) of the Code to prevent the bases of assets transferred to a corporation from being increased above such assets' aggregate fair market value as a result of a liability assumption. In addition, in 2000, Congress enacted section 358(h) to reduce the basis of stock received in certain corporate nonrecognition transactions, but not below fair market value, by the amount of any liabilities assumed in the transaction. Following the enactment of sections 362(d) and 358(h), Congress remained concerned that taxpayers were engaging in various tax-motivated transactions to take more than one tax deduction for a single economic loss. Consequently, in the American Jobs Creation Act of 2004 (Pub. L. 108-357, 188 Stat. 1418), Congress enacted section 362(e), which limits the ability of taxpayers to duplicate net built-in loss in certain nonrecognition transactions. Section 362(e)(1)(A) provides that if there would be an importation of a net built-in loss in a transaction described in section 362(a) or (b), the basis of certain property acquired in such a transaction shall be its fair market value immediately after the transaction. Section 362(e)(1)(B) provides that property is described in section 362(e)(1) if gain or loss with respect to such property is not subject to tax in the hands of the transferor immediately before the transfer, and gain or loss with respect to such property is subject to tax in the hands of the transferee immediately after the transfer. Further, section 362(e)(1)(C) provides that there is an importation of net built-in loss in a transaction if the transferee's aggregate adjusted basis in such property would (but for the application of section 362(e)(1)) exceed the aggregate fair market value of such property immediately after the transaction. Section 362(e)(2)(A) provides that if property is transferred by a transferor to a transferee in a transaction described in section 362(a) and not described in section 362(e)(1), and if the transferee's aggregate adjusted basis in the transferred property would (but for the application of section 362(e)(2)) exceed its aggregate fair market value immediately after the transfer, then the transferee's aggregate adjusted basis in the transferred property shall not exceed the fair market value of the property immediately after the transfer. Further, section 362(e)(2)(B) provides that this aggregate reduction in the basis of the transferred property shall be allocated among the property in proportion to their respective built-in losses immediately before the transaction. As an alternative to this reduction in the basis of the transferred assets, section 362(e)(2)(C) provides that if the transferor and the transferee both so elect, section 362(e)(2)(A) shall not apply, and the transferor's basis in the stock of the transferee received in exchange for the property that would otherwise be subject to basis reduction under section 362(e)(2)(A) shall not exceed its fair market value. Since the enactment of section 362(e)(2), the IRS and Treasury Department have been exploring issues concerning the interpretation, scope, and application of the section and have proposed these regulations to address these issues. Additional guidance regarding the application of section 362(e)(2) to transfers between members of a consolidated group and the treatment of transactions that have the effect of importing losses into the U.S. tax system (to which section 362(e)(1) applies) will be addressed in separate guidance projects. Explanation of Provisions 1. General Provisions In general, these proposed regulations apply to transfers of net built-in loss property within the U.S. tax system in which the Code otherwise would duplicate the net built-in asset loss in the stock of the transferee. Such transfers include exchanges subject to section 351, capital contributions, and transfers of paid-in surplus. However, these proposed regulations do not apply to a transfer where the duplicated loss is imported into the U.S. tax system and the transfer is subject to section 362(e)(1), which addresses certain loss importation transactions. Property is net built-in loss property if the transferee corporation's aggregate basis in the property, but for the application of section 362(e)(2), would exceed the aggregate fair market value of such property immediately after the transfer. If section 362(e)(2) applies to a transfer, the transferee corporation receives the property with an aggregate basis not exceeding the aggregate fair market value of the property immediately after the transfer. The transferee allocates the basis reduction among the transferred loss properties in proportion to the amount of loss in each such property immediately before the transfer. Taxpayers have questioned the effect of any gain taken into account as a result of the transfer. The IRS and Treasury Department have determined that any gain recognized by the transferor that increases the transferee corporation's basis in the transferred property must be taken into account in order to determine the full amount of loss duplication. Accordingly, these proposed regulations provide that in determining whether the transferred property has a net built-in loss in the hands of the transferee, the bases of such property first must be increased under section 362(a) or
(b)for any gain recognized by the transferor on the transfer of the property. There also have been questions about the application of section 362(e)(2) in the case of multiple transferors. The legislative history to section 362(e)(2) contains some potentially conflicting language that refers to the aggregate adjusted basis of property contributed by a transferor or a control group of which the transferor is a member. See Conf. Rep. No. 108-755, 108th Cong., 2d Sess. 635 (2004). However, because the basis rules in section 362 and section 358 are applied on a transferor-by-transferor basis, applying section 362(e)(2) to an aggregated group of transferors would undermine Congress' intent to prevent loss duplication. Further, section 362(e)(2) specifically refers to property “transferred by a transferor.” Accordingly, these proposed regulations clarify that section 362(e)(2) applies separately to each transferor. Thus, each transferor's transfer is measured separately, and the determination of whether that transfer is subject to these provisions is made solely by reference to the property transferred by such transferor. Consequently, the treatment of one transferor is unaffected by the transfer of property by any other transferor for purposes of section 362(e)(2). In addition, these proposed regulations clarify that, even if part of a transaction is subject to section 362(e)(1), section 362(e)(2) can apply to the portion of the transaction that is not described in section 362(e)(1). 2. Application of Section 362(e)(2) to Transfers Outside of the U.S. Tax System Under general principles of law, the Code applies to all transactions without regard to whether such application has any current U.S. tax consequences. In the case of transfers that are wholly outside the U.S. tax system, section 362(e)(2) applies but does not have relevance unless and until the assets transferred or the stock received in the exchange enter the U.S. tax system. Such assets or stock may subsequently enter the U.S. tax system either directly or indirectly. For example, the assets or stock could directly enter the U.S. tax system through a transfer of all or a portion of such assets or stock to a U.S. person, or as a result of the original transferor or original transferee becoming a U.S. person. Further, the assets or stock could indirectly enter the U.S. tax system, for example, through a transfer of all or a portion of such assets or stock to a CFC, or as a result of the original transferor or original transferee becoming a CFC. However, in many cases the U.S. tax treatment of a transfer that is wholly outside the U.S. tax system will never become relevant. The IRS and Treasury Department recognize that, if a transferor does not anticipate the transfer becoming U.S. tax relevant, it is not likely to undertake the valuation and record-keeping that section 362(e)(2) would generally require. If circumstances change at some later date, the administrative burden of reconstructing appropriate records may be substantial. The IRS and Treasury Department have determined that relief is appropriate when transactions are consummated with no plan or intention to enter the U.S. tax system. Thus, if assets are transferred in a transaction that is potentially subject to section 362(e)(2) more than two years before entering the U.S. tax system, then, solely for purposes of section 362(e)(2), these proposed regulations generally presume that the aggregate fair market value of the transferred assets equals their aggregate adjusted basis in the hands of the transferee immediately after the transfer. This presumption applies only if neither the original transfer nor the later entry of any portion of the assets into the U.S. tax system was undertaken with a view to reducing the U.S. tax liability of any person or duplicating loss by avoiding the application of section 362(e)(2). If a transfer subject to section 362(e)(2) occurs within the two-year period immediately before becoming U.S. tax relevant, the IRS and Treasury Department do not believe that relief from the administrative burden is either necessary or appropriate. Thus, in such a case, the fair market value presumption does not apply, and section 362(e)(2) applies to the original transfer. The proposed regulations provide the relevant parties a means by which to make an election under section 362(e)(2)(C), if desired, at the time of entry into the U.S. tax system. 3. General Application of Section 362(e)(2) to Reorganizations Taxpayers have questioned whether a transaction described in both sections 362(a) and 362(b) may be subject to section 362(e)(2). The IRS and Treasury Department believe that, if there is a duplication of loss in a transaction described in section 362(a) (and not subject to section 362(e)(1)), Congressional intent requires that the transaction be recognized as described in section 362(a) notwithstanding that it is also described in section 362(b). The proposed regulations clarify that section 362(e)(2) can apply to such transactions. 4. Exception for Transactions in Which Net Built-in Loss Is Eliminated Without Recognition In certain transactions, the transferor's duplicated basis in the transferee stock or securities is eliminated by operation of statute without recognition or benefit. For example, in a transaction meeting the requirements of both sections 351 and 368(a)(1)(D), the transferor ordinarily receives stock with an aggregate basis equal to that of the transferred property. As a result, where the transferred property has a net-built in loss, but for section 362(e)(2), the transferor would receive the transferee stock with an adjusted basis that duplicates the built-in loss in the transferred property. However, if the transferor distributes the transferee stock pursuant to a section 368(a)(1)(D) acquisitive reorganization or pursuant to section 355, no taxpayer will recognize the duplicated loss because the distributee will determine its basis in the transferee stock by reference to its basis in surrendered stock of the transferor. The IRS and Treasury Department have concluded that, even if a transaction is described in section 362(e)(2), if there is no duplicated loss that can be recognized, section 362(e)(2) should not apply. Accordingly, these proposed regulations provide that section 362(e)(2) will not apply to transactions to the extent that loss duplication is prevented or eliminated where the transferor distributes the transferee stock and/or securities received in the transaction without recognizing gain or loss, and, upon completion of the transaction, no person holds any asset with a basis determined in whole or in part by reference to the transferor's basis in the transferee stock and/or securities. 5. Application of Section 362(e)(2) to Transfers in Exchange for Securities In certain transactions, net built-in loss also can be duplicated in securities received without the recognition of gain or loss. For example, a U.S. transferor duplicates a net built-in loss when it transfers property with a net built-in loss to a U.S. controlled corporation in exchange for stock and securities and all or part of the securities are retained following the distribution of the stock of the controlled corporation pursuant to section 355. Such a transaction is described in section 362(a) but not section 362(e)(1) and, accordingly, may be subject to section 362(e)(2). Although the statute is silent about the treatment of securities received in such a property transfer, the IRS and Treasury Department have concluded that Congressional intent would be circumvented if section 362(e)(2) were treated as not applying to both stock and securities received in transactions to which section 362(e)(2) applies. Accordingly, these proposed regulations apply section 362(e)(2) to transfers in exchange for both stock and securities to the extent necessary to eliminate loss duplication. Because the section applies equally to transfers in exchange for both stock and securities, the IRS and Treasury Department have concluded that taxpayers must be allowed to make an election under section 362(e)(2)(C) for both stock and securities. Accordingly, these proposed regulations allow the transferor and transferee to elect to apply section 362(e)(2)(C) to the transferee stock and securities received in the exchange. 6. Election To Reduce Stock Basis Section 362(e)(2)(C) permits transferors and transferees that engage in transactions to which section 362(e)(2) applies to elect to reduce the transferor's basis in the stock received instead of reducing the transferee corporation's basis in the property transferred. As described in this preamble, section 362(e)(2)(C) provides that if the election is made, section 362(e)(2)(A) shall not apply, and the transferor's basis in the transferee stock received in the exchange shall not exceed its fair market value immediately after the exchange. The statutory language might be interpreted to require the transferor to reduce its basis in the stock received by an amount that is larger than the amount by which the transferee otherwise would have been required to reduce its aggregate basis in the assets under section 362(e)(2)(A). For example, assume a corporation, P, contributes a trade or business to a subsidiary, S, in a transaction to which section 351 applies. The assets of the business have an aggregate adjusted basis of $100 and a value of $90, and the business has $20 of associated contingent liabilities. Even if section 358(h)(2)(A) applies to prevent section 358 from reducing P's basis in the S stock by the amount of the contingent liabilities, section 362(e)(2)(C) might be interpreted to limit P's basis in the S stock to $70 (notwithstanding that section 362(e)(2)(A) would only require a $10 reduction in the basis of the assets in the hands of S). Thus, a section 362(e)(2)(C) election might result in a larger basis reduction in the stock than would be required in the assets absent an election. The IRS and Treasury Department believe that, because section 362(e)(2) is intended to prevent the duplication of net built-in loss in the transferred assets, the amount of basis reduction resulting from an election under section 362(e)(2)(C) should not be any larger than what is necessary to eliminate the duplication of loss in the transferred assets. Therefore, these proposed regulations clarify that the amount of the reduction in the basis of the transferee stock (and securities) as a result of an election to apply section 362(e)(2)(C) is equal to the net built-in loss in the transferred assets in the hands of the transferee. In other words, under the proposed regulations, the amount of the reduction in the basis of the transferee stock (and securities) resulting from such an election equals the amount of the reduction in the basis of the assets required by section 362(e)(2)(A) absent the election. These proposed regulations also implement Notice 2005-70, 2005-41 IRB 694, see § 601.601(d)(2), which instructs taxpayers how to elect to apply section 362(e)(2)(C). These proposed regulations revise and expand upon the procedures in Notice 2005-70 to provide more methods and time periods in which to make the section 362(e)(2)(C) election. Specifically, the regulations expand the classifications of persons who can attach the required election statement to a tax return (including an information return). The “protective election” referenced in Notice 2005-70 also is included in the proposed regulations because the IRS and Treasury Department anticipate that, at the time of the transaction, taxpayers may not always be able to determine with reasonable certainty whether section 362(e)(2) applies to a transfer. The IRS and Treasury Department request comments on whether the instructions provided in these proposed regulations adequately address the needs of taxpayers. In particular, the IRS and Treasury Department invite comments regarding whether, alternatively, a separate form should be developed and made available to enable taxpayers to make the section 362(e)(2)(C) election prior to and apart from filing it with a U.S. return. The basis tracing provisions in § 1.358-2 apply to certain transfers to which section 351 and either section 354 or section 356 apply. However, the IRS and Treasury Department believe that the basis tracing provisions in § 1.358-2 should not apply to a transfer to which section 362(e)(2) also applies if the transferor and transferee make an election to apply section 362(e)(2)(C). The IRS and Treasury Department believe that the statutory language in section 362(e)(2)(C) and the policy of preventing loss duplication precludes the application of the basis tracing provisions because basis tracing could allow the transferor to hold transferee stock or securities with a basis in excess of fair market value even after a reduction under section 362(e)(2)(C). Accordingly, these proposed regulations provide that the provisions of § 1.358-2(a)(2) will not apply to a transaction to which section 362(e)(2) applies if the transferor and transferee elect to apply section 362(e)(2)(C). The IRS and Treasury Department request comments regarding whether this treatment is appropriate. 7. Transfers by Partnerships and S Corporations The proposed regulations also provide that, where the transferor is a partnership and a section 362(e)(2)(C) election is made, any reduction to the partnership's basis in the transferee stock received is treated as an expenditure of the partnership, as described in section 705(a)(2)(B). The proposed regulations provide a similar rule applicable to transfers by S corporations that elect to apply section 362(e)(2)(C). The IRS and Treasury Department are further exploring how the provisions of section 362(e)(2) apply to partnerships. The IRS and Treasury Department invite comments on this general issue and specifically invite comments regarding the transfer of a partnership interest in exchange for stock in a section 351 transaction to which section 362(e)(2) applies. For example, individuals A and B contribute cash to form a partnership, PRS. PRS purchases property that subsequently decreases in value. A contributes his PRS interest to a corporation in a transaction that qualifies under section 351. PRS does not make an election under section 754. Comments are invited regarding the interaction of section 362(e)(2) and the partnership provisions under these and similar facts. 8. Application of Section 336(d) to Property Previously Transferred in a Section 362(e)(2) Transaction Commentators have questioned how section 362(e)(2) interacts with other Code sections. Specifically, some have asked how section 362(e)(2) applies when section 336(d) might be implicated. Section 336(d) provides various limitations on a liquidating corporation's ability to recognize loss when it distributes property acquired in a section 351 transaction or as a contribution to capital. The IRS and Treasury Department believe that, generally, sections 336(d) and 362(e)(2) are fully compatible where the parties do not make an election to apply section 362(e)(2)(C). However, where an election has been made, the two sections may operate to deny part or all of an economic loss. The IRS and Treasury Department invite comments regarding this issue. 9. Application to Section 304 Transactions In response to inquiries, the proposed regulations contain an example demonstrating how section 362(e)(2) applies to a section 351 transaction treated as occurring under section 304. The IRS and Treasury Department are considering whether the regulations should deem an election to apply section 362(e)(2)(C) to have been made in section 304 transactions. The IRS and Treasury Department invite comments regarding this issue. Proposed Effective Date These proposed regulations are proposed to apply to transactions occurring after the date these regulations are published as final regulations in the **Federal Register** . Special Analyses It has been determined that this notice of proposed rulemaking is not a significant regulatory action as defined in Executive Order 12866. Therefore, a regulatory assessment is not required. It has also been determined that section 553(b) of the Administrative Procedure Act (5 U.S.C. chapter 5) does not apply to these regulations, and, because the regulations do not impose a collection of information on small entities, the Regulatory Flexibility Act (5 U.S.C. chapter 6) does not apply. Pursuant to section 7805(f) of the Code, this regulation has been submitted to the Chief Counsel for Advocacy of the Small Business Administration for comment on its impact on small business. Comments and Requests for a Public Hearing Before these proposed regulations are adopted as final regulations, consideration will be given to any written (a signed original and eight
(8)copies) or electronic comments that are submitted timely to the IRS. The IRS and Treasury Department request comments on the clarity of the proposed rules and how they can be made easier to understand. All comments will be available for public inspection and copying. A public hearing may be scheduled if requested in writing by any person who timely submits written comments. If a public hearing is scheduled, notice of the date, time, and place of the hearing will be published in the **Federal Register** . Drafting Information The principal authors of these regulations are Jay M. Singer and Filiz A. Serbes of the Office of Associate Chief Counsel (Corporate), IRS. However, other personnel from the IRS and Treasury Department participated in their development. List of Subjects in 26 CFR Part 1 Income taxes, Reporting and recordkeeping requirements. Proposed Amendments to the Regulations Accordingly, 26 CFR part 1 is proposed to be amended as follows: PART 1—INCOME TAXES **Paragraph 1.** The authority citation for part 1 is amended by adding an entry in numerical order to read in part as follows: Authority: 26 U.S.C. 7805 * * * Section 1.362-4 also issued under 26 U.S.C. 362. * * * **Par. 2.** Section 1.358-2 is amended by revising paragraphs (a)(2)(viii) and adding a new sentence at the end of paragraph
(d)to read as follows: § 1.358-2 Allocation of basis among nonrecognition property.
(a)* * *
(2)* * *
(viii)This paragraph (a)(2) shall not apply to determine the basis of a share of stock or security received by a shareholder or security holder in an exchange described in both section 351 and either section 354 or section 356, if, in connection with the exchange, the shareholder or security holder exchanges property for stock or securities in an exchange to which neither section 354 nor section 356 applies, the shareholder or security holder exchanges property for stock or securities to which it elects to apply section 362(e)(2)(C), or liabilities of the shareholder or security holder are assumed.
(d)* * * Paragraph (a)(2)(viii) of this section applies to exchanges and distributions of stock occurring after the date these regulations are published as final regulations in the **Federal Register** . **Par. 3.** In § 1.362-3, the section heading is added and reserved to read as follows: § 1.362-3 Limitations on loss importation. [Reserved]. **Par. 4.** Section 1.362-4 is added to read as follows: § 1.362-4 Limitations on built-in loss duplication.
(a)*Purpose and scope.* The purpose of this section is to prevent the duplication of net built-in loss in transactions described in section 362(e)(2). Section 362(e)(2) applies to transfers of net built-in loss property described in section 362(a) but only to the extent not described in section 362(e)(1).
(b)*Application* —(1) *In general.* If property is transferred in any transaction described in section 362(a) but not section 362(e)(1), and, in the hands of the transferee, the transferred property would otherwise have a net built-in loss immediately after the transfer, then the transferee corporation receives such property with an aggregate adjusted basis not exceeding the aggregate fair market value of such property immediately after the transfer. If multiple built-in loss properties are transferred, the aggregate reduction in basis shall be allocated among the built-in loss properties so transferred in proportion to the relative amount of built-in loss in each property.
(2)*Multiple transferors.* If more than one transferor transfers property to a corporation in a transaction described in section 362(a), whether and the extent to which this section applies is determined separately for each transferor.
(3)*Transactions described in section 362(e)(1).* A transfer of property to a corporation is described in section 362(e)(1) only if and to the extent that the transferred property described in section 362(e)(1)(B) (section 362(e)(1)(B) property) would otherwise have a net built-in loss in the hands of the transferee. Thus, if a transferor transfers net built-in loss section 362(e)(1)(B) property together with property not described in section 362(e)(1)(B), the transfer of the net built-in loss section 362(e)(1)(B) property is described in section 362(e)(1). Accordingly, the net built-in loss section 362(e)(1)(B) property is not taken into account for purposes of determining whether section 362(e)(2) applies to the transfer of the other property. Alternatively, if a transferor transfers net built-in gain section 362(e)(1)(B) property together with property not described in section 362(e)(1)(B), no portion of the transfer is described in section 362(e)(1).
(4)*Net built* -in loss—(i) *In general.* Transferred property has a net built-in loss if its aggregate adjusted basis exceeds its aggregate fair market value.
(ii)*Basis adjustments for gain recognized on the transfer.* For purposes of determining whether the transferred property has a net built-in loss in the hands of the transferee, the bases of such property first must be increased under section 362(a) or
(b)for any gain recognized by the transferor on the transfer of such property.
(5)*Application of section 362(e)(2) to reorganizations.* Section 362(e)(2) can apply to a transfer regardless of whether the basis of the property would, but for section 362(e)(2), be determined under section 362(b).
(6)*Exception for transactions in which net built-in loss is eliminated without recognition.* Section 362(e)(2) does not apply to a transfer of property to the extent that—
(i)The transferor distributes, without recognizing gain or loss, all of the transferee stock received in exchange for the transferred property; and
(ii)Upon completion of the transaction, no person holds transferee stock or any other asset with a basis determined in whole or in part by reference to the transferor's basis in the transferee stock.
(7)*Transfers where neither party is a U.S. person, a person otherwise required to file a U.S. return, or a CFC.* If property is transferred in a transaction described in section 362(a) but not section 362(e)(1), then, solely for purposes of section 362(e)(2), the aggregate fair market value of the transferred property shall be deemed to equal the aggregate adjusted basis of such property in the hands of the transferee immediately after the transfer if—
(i)Neither party to the transfer was a United States (U.S.) person (as defined in section 7701(a)(30)) on the date of the transfer;
(ii)Neither party to the transfer was required to file a return of tax under Subtitle A of the Internal Revenue Code (including an information return) for the year of the transfer;
(iii)Neither party to the transfer was a controlled foreign corporation (CFC), as defined in section 957, on the date of the transfer;
(iv)The transfer occurred more than two years prior to the date on which the transferor, transferee, or transferred assets are first described in paragraph (c)(5)(iii) of this section; and
(v)Neither the transfer nor the later entry into the U.S. tax system was entered into with a view to reducing the U.S. Federal income tax liability of any person or duplicating loss by avoiding the application of section 362(e)(2).
(c)*Section 362(e)(2)(C) election to apply limitation to transferor's stock basis* —(1) *In general.* If section 362(e)(2) applies to a transfer, the transferor and the transferee may make a joint election to reduce the transferor's basis in the transferee stock instead of reducing the transferee's basis in the property received under paragraph
(b)of this section. Once made, the election is irrevocable. If the election is made, the transferor's basis in the transferee stock is reduced upon receipt by the transferor. The transferor and the transferee may make a protective election under this section, which will have no effect if section 362(e)(2) does not apply to the transfer, but which will otherwise be binding and irrevocable.
(2)*Stock and securities to which this section applies.* For purposes of this section, the term *stock* means stock and securities received without the recognition of gain or loss in a transaction to which section 362(e)(2) applies. See, for example, transactions described in sections 368(a)(1)(D) and 355.
(3)*Amount of basis reduction.* If an election is made pursuant to paragraph (c)(1) of this section, the amount of the basis reduction in the transferee stock received by the transferor in the transaction is equal to the total amount by which the aggregate basis of the transferred property would have been reduced under paragraph
(b)of this section had such election not been made.
(4)*Allocation of basis reduction.* The transferor shall allocate the amount of the basis reduction under this paragraph
(c)among all transferee stock received in the transaction in proportion to fair market value.
(5)*Procedures for making the election* —(i) *In general.* To make an election to apply section 362(e)(2)(C)—
(A)Prior to filing the election statement as described in paragraph (c)(5)(ii) or (c)(5)(iii) of this section, the transferor and transferee must execute a written, binding agreement electing to apply section 362(e)(2)(C); and
(B)An election statement must be filed pursuant to paragraph (c)(5)(ii) or (c)(5)(iii) of this section.
(ii)*Election statement where the transferor or transferee is a U.S. person, a person otherwise required to file a U.S. return for the year of the transfer, or a CFC on the date of the transfer—*
(A)* Transferor is a U.S. person or a person otherwise required to file a U.S. return for the year of the transfer.* If the transferor is a U.S. person on the date of the transfer or a person otherwise required to make a return of tax under Subtitle A of the Internal Revenue Code (including an information return) for the year of the transfer, the election statement is filed by including the following statement on or with the transferor's timely filed original return (including extensions) for the taxable year in which the transfer occurred: “[insert name and tax identification number of transferor] certifies that [insert name and tax identification number of transferor] and [insert name and tax identification number, if any, of transferee] elect to apply section 362(e)(2)(C) with respect to a transfer of property described in section 362(e)(2)(A) on [insert date(s) of transfer(s)].”
(B)*Transferor is a CFC on the date of the transfer.* If, on the date of the transfer, the transferor is a CFC that is not required to make a return of tax under Subtitle A of the Internal Revenue Code (including an information return) for the year of the transfer, the election statement is filed by including the following statement on or with the timely filed original return (including extensions) of each one of the transferor's controlling U.S. shareholders, as defined in § 1.964-1(c)(5), for the taxable year within which the transfer occurred: “[insert name and tax identification number of controlling U.S. shareholder filing return] certifies that [insert name and tax identification number, if any, of transferor (the CFC)] and [insert name and tax identification number, if any, of transferee] elect to apply section 362(e)(2)(C) with respect to a transfer of property described in section 362(e)(2)(A) on [insert date(s) of transfer(s)]. [insert name(s) and tax identification number(s) of any other controlling U.S. shareholder(s) of the CFC, or, if none, state that there are no other controlling U.S. shareholders of the CFC].”
(C)*Transferor is not a U.S. person on the date of the transfer, a person otherwise required to file a U.S. return for the year of the transfer, or a CFC on the date of the transfer, and transferee is a U.S. person on the date of the transfer or a person otherwise required to file a U.S. return for the year of the transfer.* If the transferor is not described in paragraph (c)(5)(ii)(A) or (c)(5)(ii)(B) of this section and the transferee is a U.S. person on the date of the transfer or otherwise required to make a return of tax under Subtitle A of the Internal Revenue Code (including an information return) for the year of the transfer, the election statement is filed by including the following statement on or with the transferee's timely filed original return (including extensions) for the taxable year in which the transfer occurred: “[insert name and tax identification number of transferee] certifies that [insert name and tax identification number, if any, of transferor] and [insert name and tax identification number of transferee] elect to apply section 362(e)(2)(C) with respect to a transfer of property described in section 362(e)(2)(A) on [insert date(s) of transfer(s)].”
(D)*Transferor is not a U.S. person on the date of the transfer, a person otherwise required to file a U.S. return for the year of the transfer, or a CFC on the date of the transfer, and transferee is a CFC on the date of the transfer.* If the transferor is not described in paragraph (c)(5)(ii)(A) or (c)(5)(ii)(B) of this section, and, on the date of the transfer, the transferee is a CFC that is not required to make a return of tax under Subtitle A of the Internal Revenue Code (including an information return) for the year of the transfer, the election statement is filed by including the following statement on or with the timely filed original return (including extensions) of each one of the transferee's controlling U.S. shareholders as defined in § 1.964-1(c)(5) for the taxable year within which the transfer occurred: “[insert name and tax identification number of controlling U.S. shareholder filing return] certifies that [insert name and tax identification number, if any, of transferor] and [insert name and tax identification number, if any, of transferee (the CFC)] elect to apply section 362(e)(2)(C) with respect to a transfer of property described in section 362(e)(2)(A) on [insert date(s) of transfer(s)]. [insert name(s) and tax identification number(s) of any other controlling U.S. shareholder(s) of the CFC, or, if none, state that there are no other controlling U.S. shareholders of the CFC].”
(iii)*Election where neither the transferor nor the transferee is a U.S. person on the date of the transfer, a person otherwise required to file a U.S. return for the year of the transfer, or a CFC on the date of the transfer.* If the parties to a transfer to which section 362(e)(2) applies are not described in any of the classifications set forth in paragraph (c)(5)(ii) of this section, then the election statement under this paragraph
(c)is made as described in this paragraph (c)(5)(iii).
(A)*Transferor later becomes a U.S. person, a person otherwise required to file a U.S. return, or a CFC.* If the transferor later becomes a U.S. person, a person otherwise required to make a return of tax under Subtitle A of the Internal Revenue Code (including an information return), or a CFC, an election statement under this paragraph
(c)is filed as described in this paragraph (c)(5)(iii)(A). ( *1* ) If the transferor becomes a U.S. person or a person otherwise required to make a return of tax under Subtitle A of the Internal Revenue Code (including an information return), the election statement is filed by including the statement described in paragraph (c)(5)(ii)(A) of this section on or with the transferor's timely filed original return (including extensions) for the taxable year in which the transferor first becomes a U.S. person or a person otherwise required to make a return. ( *2* ) If the transferor becomes a CFC that is not required to make a return of tax under Subtitle A of the Internal Revenue Code (including an information return), the election statement is filed by including the statement described in paragraph (c)(5)(ii)(B) of this section on or with the timely filed original return (including extensions) of each one of the transferor's controlling U.S. shareholders, as defined in § 1.964-1(c)(5), for the taxable year within which the transferor becomes a CFC.
(B)*Transferee later becomes a U.S. person, a person otherwise required to file a U.S. return, or a CFC.* If the transferor is not described in paragraph (c)(5)(iii)(A) of this section, and the transferee later becomes a U.S. person, a person otherwise required to make a return of tax under Subtitle A of the Internal Revenue Code (including an information return), or a CFC, an election statement under this paragraph
(c)is filed as described in this paragraph (c)(5)(iii)(B). ( *1* ) If the transferee becomes a U.S. person or a person otherwise required to make a return of tax under Subtitle A of the Internal Revenue Code (including an information return), the election statement is filed by including the statement described in paragraph (c)(5)(ii)(C) of this section on or with the transferee's timely filed original return (including extensions) for the taxable year in which the transferee first becomes required to make a return. ( *2* ) If the transferee becomes a CFC that is not required to make any return of tax under Subtitle A of the Internal Revenue Code (including an information return), the election statement is filed by including the statement described in paragraph (c)(5)(ii)(D) of this section on or with the timely filed original return (including extensions) of each one of the transferee's controlling U.S. shareholders as defined in § 1.964-1(c)(5) for the taxable year within which the transferee becomes a CFC.
(C)*A U.S. person, a person otherwise required to file a U.S. return, or a CFC later acquires the transferred assets or transferee stock in a transferred basis transaction.* If neither the transferor nor the transferee is described in paragraph (c)(5)(iii)(A) or (c)(5)(iii)(B) of this section and a U.S. person, a person otherwise required to make a return of tax under Subtitle A of the Internal Revenue Code (including an information return), or a CFC not required to make a return of tax under Subtitle A of the Internal Revenue Code (including an information return) later acquires, in a transferred basis transaction, any portion of the assets that were transferred in a prior transaction to which section 362(e)(2) applied (section 362(e)(2) assets) or stock of the transferee corporation received in such prior transaction (section 362(e)(2) stock), then the election statement under this paragraph
(c)is filed as described in this paragraph (c)(5)(iii)(C). ( *1* ) If a U.S. person or a person otherwise required to make a return of tax under Subtitle A of the Internal Revenue Code (including an information return) later acquires, in a transferred basis transaction, any portion of the section 362(e)(2) assets or section 362(e)(2) stock, the election statement is filed by including the following statement on or with such acquiror's timely filed original return (including extensions) for the taxable year in which the acquiror first acquires any portion of the section 362(e)(2) assets or section 362(e)(2) stock: “[insert name and tax identification number of the acquiror] certifies that [insert name and tax identification number, if any, of transferor] and [insert name and tax identification number, if any, of transferee] elect to apply section 362(e)(2)(C) with respect to a transfer of property described in section 362(e)(2)(A) on [insert date(s) of transfer(s)].” ( *2* ) If no person described in paragraph (c)(5)(iii)(C)( *1* ) of this section has acquired any portion of the section 362(e)(2) assets or section 362(e)(2) stock, and a CFC not required to make a return of tax under Subtitle A of the Internal Revenue Code (including an information return) later acquires, in a transferred basis transaction, any portion of the section 362(e)(2) assets or section 362(e)(2) stock, the election statement is filed by including the following statement on or with each of the CFC's controlling U.S. shareholders' timely filed original returns (including extensions) for the taxable year within which the CFC first acquires any portion of the section 362(e)(2) assets or section 362(e)(2) stock: “[insert name and tax identification number of controlling U.S. shareholder filing return] certifies that [insert name and tax identification number, if any, of transferor] and [insert name and tax identification number, if any, of transferee] elect to apply section 362(e)(2)(C) with respect to a transfer of property described in section 362(e)(2)(A) on [insert date(s) of transfer(s)]. [insert name(s) and tax identification number(s) of any other controlling U.S. shareholder(s) of the CFC, or, if none, state that there are no other controlling U.S. shareholders of the CFC].”
(6)*Transfers by partnerships.* If the transferor is a partnership, for purposes of applying section 705 (determination of basis of partner's interest), any reduction under this section to the transferor's basis in the stock received in exchange for the transferred property is treated as an expenditure of the partnership described in section 705(a)(2)(B).
(7)*Transfers by S corporations.* If the transferor is an S corporation, for purposes of applying section 1367 (adjustments to basis of stock of shareholders, etc.), any reduction under this section to the transferor's basis in the stock received in exchange for the transferred property is treated as an expense of the S corporation described in section 1367(a)(2)(D).
(d)*Examples.* The following examples illustrate paragraphs
(a)through
(c)of this section. Unless otherwise indicated, all transferred property is subject to tax under Subtitle A of the Internal Revenue Code in the hands of the transferor, and, accordingly, section 362(e)(1) does not apply to the transaction. In addition, all assets are capital assets in the hands of the transferor and have been held for more than one year. Example 1. *Property transfer qualifying under section 351.*
(i)*Facts.* Individual A owns Asset 1 with a basis of $90 and a fair market value of $60, and Asset 2 with a basis of basis of $110 and a fair market value of $120. In a transaction qualifying under section 351, A transfers Asset 1 and Asset 2 to newly formed corporation X in exchange for all of the X common stock. A and X do not elect to apply section 362(e)(2)(C) to reduce A's basis in the X stock received.
(ii)*Analysis.* Under section 362(a), X would otherwise receive Asset 1 and Asset 2 with an aggregate basis of $200 ($90+$110), which exceeds their aggregate fair market value of $180 ($60+$120). As a result, the assets have a net built-in loss of $20, and this section applies to the transfer. Under paragraph (b)(1) of this section, X reduces its basis in Asset 1 by $20 to $70 and, under section 362(a), takes a basis in Asset 2 of $110. Under section 358(a), A receives X stock with a basis of $200.
(iii)*Election to apply section 362(e)(2)(C).* The facts are the same as in paragraph
(i)of this *Example 1* , except that A and X elect to apply section 362(e)(2)(C) to reduce A's basis in the X stock received. Under paragraph (c)(3) of this section, A reduces its basis in the X stock received by the amount X would have been required to reduce its basis in the transferred assets had the election to apply section 362(e)(2)(C) not been made. Accordingly, A receives X stock with an aggregate basis of $180, and, under section 362(a), X receives Asset 1 with a basis of $90 and Asset 2 with a basis of $110. Example 2. *Property transfer qualifying under section 351 and described in section 368(a)(1)(B).*
(i)*Facts.* Corporation P owns all of the outstanding stock of corporations S1 and S2. In a transaction qualifying under section 351 and described in section 368(a)(1)(B), P transfers all 10 shares of its S2 stock to S1 in exchange for an additional 10 shares of S1 voting stock. At the time of the transfer, each share of the S2 stock has a basis of $10 and a fair market value of $7. P and S1 do not elect to apply section 362(e)(2)(C) to reduce P's basis in its S1 stock.
(ii)*Analysis.* Under section 362, S1 would otherwise receive the 10 shares of S2 stock with a basis of $10 per share, which exceeds their fair market value of $7 per share. As a result, the S2 stock has a net built-in loss of $30, and this section applies to the transfer. Under paragraph (b)(1) of this section, S1 reduces its basis in the S2 stock by $30 to $70. Under section 358(a), P receives the additional 10 shares of S1 stock with a basis of $10 per share.
(iii)*Election under section 362(e)(2)(C).*
(A)The facts are the same as in paragraph
(i)of this *Example 2* , except that P and S1 elect to apply section 362(e)(2)(C) to reduce P's basis in its S1 stock received. Under paragraph (c)(3) of this section, P reduces its basis in the S1 stock received by the amount S1 would have been required to reduce its basis in the transferred S2 stock had the election to apply section 362(e)(2)(C) not been made. Accordingly, under paragraph (c)(4) of this section, P receives the additional 10 shares of S1 stock each with a basis of $7. Under section 362, S1 receives the 10 shares of S2 stock each with a basis of $10.
(B)The facts are the same as in paragraph
(i)of this *Example 2* , except that five shares of the S2 stock have a basis of $10 each, five shares have a basis of $5 each, and P and S1 elect to apply section 362(e)(2)(C) to reduce P's basis in its S1 stock. The $75 ((5 × $10) + (5 × $5)) aggregate basis in the S2 stock exceeds the $70 aggregate fair market value of the S2 stock, and this section applies to the transfer. Under paragraph (c)(3) of this section, P reduces its basis in the S1 stock received by the amount S1 would have been required to reduce its basis in the transferred S2 stock had the election to apply section 362(e)(2)(C) not been made. Accordingly, under paragraph (c)(4) of this section and § 1.358-2(a)(2)(viii), P receives the additional 10 shares of S1 stock each with a basis of $7. Under section 362, S1 receives five shares of the S2 stock with a basis of $10 each and five shares of the S2 stock with a basis of $5 each. Example 3. *Property transfer qualifying under section 351 and described in section 368(a)(1)(A).*
(i)*Facts.* Individual A owns all of the outstanding stock of corporation X and corporation Y, which owns Asset 1 with an adjusted basis of $250 and a fair market value of $210. A also owns Asset 2 with an adjusted basis of $120 and a fair market value of $130. In a transaction qualifying as a reorganization described in section 368(a)(1)(A), Y merges with and into X. Pursuant to the same plan, A transfers Asset 2 to X in exchange for additional X stock. Y's transfer of Asset 1 to X in the merger coupled with A's transfer of Asset 2 to X in exchange for X stock qualifies as a section 351 contribution.
(ii)*Analysis.* Under paragraph (b)(2) of this section, the potential application of section 362(e)(2) is determined separately for each transferor. Y is treated as having transferred Asset 1 to X in exchange for X stock, and X would otherwise take Asset 1 with a basis of $250, which exceeds its fair market value of $210. As a result, Asset 1 has a built-in loss of $40. Under paragraph (b)(6) of this section, section 362(e)(2) does not apply to Y's transfer of property to X because Y distributes all of the X stock received in the exchange without recognizing gain or loss pursuant to section 361(c), and, upon completion of the transaction, no person holds X stock or any other asset with a basis determined in whole or in part by reference to Y's basis in the X stock received in the exchange. As a result, under section 362, X receives Asset 1 with a basis of $250. A's transfer of Asset 2 to X is not subject to section 362(e)(2) because X receives Asset 2 with a basis of $120, which is less than its fair market value of $130. Example 4. *Property transfers qualifying under section 351 and described in section 368(a)(1)(D), followed by a section 355 distribution.*
(i)*Facts.* Individual A and individual B each own 50 percent of corporation X. X owns Asset 1 with an adjusted basis of $120 and a fair market value of $70, Asset 2 with an adjusted basis of $160 and a fair market value of $110, and Asset 3 with an adjusted basis of $220 and a fair market value of $240. In a transaction qualifying under section 351(a) and described in section 368(a)(1)(D), X transfers Asset 1, Asset 2, and Asset 3 to Y, a newly formed corporation, in exchange for all of the Y stock, and then distributes all of the Y stock to A in exchange for all of A's X stock in a distribution qualifying under section 355. At the time of the transaction, A has no plan or intention to dispose of his Y stock, and B has no plan or intention to dispose of his X stock.
(ii)*Analysis.* The aggregate adjusted basis of the properties transferred to Y ($120 + $160 + $220 = $500) exceeds their aggregate fair market value ($70 + $110 + $240 = $420). As a result, the assets have a total net built-in loss of $80. Under paragraph (b)(6) of this section, section 362(e)(2) does not apply to this transfer of property because X distributes all of the Y stock received in the exchange without recognizing gain or loss under section 361(c), and, upon completion of the transaction, no person holds Y stock or any other asset with a basis determined in whole or in part by reference to X's basis in the Y stock received in the exchange. A's basis in the Y stock is determined under section 358 by reference to his basis in the X stock he surrenders.
(iii)*Section 355(e).*
(A)The facts are the same as in paragraph
(i)of this *Example 4* , except that, one year after the section 355 distribution, Y is acquired pursuant to a plan, resulting in the application of section 355(e) to the transaction. X and Y do not elect to apply section 362(e)(2)(C).
(B)*Analysis.* Due to the application of section 355(e), section 361(c) will not apply and X will not be granted nonrecognition treatment on the distribution of the Y stock. As a result, paragraph (b)(6) of this section does not apply, and section 362(e)(2) applies to X's transfer of assets to Y. Under paragraph (b)(1) of this section, Y reduces its basis in Asset 1 and Asset 2 by the amount of the net built-in loss in the transferred assets, or $80 ($500 − $420). The $80 basis reduction is allocated between Asset 1 and Asset 2 in proportion to their respective built-in losses. Prior to reduction, Asset 1 had a built-in loss of $50 ($120 − $70), and Asset 2 had a built-in loss of $50 ($160 − $110). As a result, the basis of Asset 1 is reduced by $40 (50/100 × $80), and the basis of Asset 2 is reduced by $40 (50/100 × $80), and Y receives Asset 1 with a basis of $80 ($120 − $40) and Asset 2 with a basis of $120 ($160 − $40).
(iv)*Retained stock and securities without a section 362(e)(2)(C) election.*
(A)The facts are the same as in paragraph
(i)of this *Example 4* , except that X transfers Asset 1, Asset 2, and Asset 3 to Y in exchange for an equal amount of Y stock and Y securities. For a valid business purpose, X retains Y stock and Y securities each worth 1 percent of the total consideration. X and Y do not elect to apply section 362(e)(2)(C).
(B)*Analysis.* The aggregate basis of the properties transferred ($120 + $160 + $220 = $500) exceeds their aggregate fair market value ($70 + $110 + $240 = $420) by $80 ($500 − $420), and this section applies to the transfer. Under paragraph (b)(6) of this section, section 362(e)(2) applies to X's transfer of assets to Y in exchange for the Y stock and the Y securities to the extent X does not distribute the Y stock and Y securities without the recognition of gain or loss. Accordingly, section 362(e)(2)(A) applies to the extent property was exchanged for the retained Y stock and Y securities (2 percent of the total). Under paragraph (b)(1) of this section, Y reduces its basis in Asset 1 and in Asset 2 by 2 percent of the amount of the net built-in loss in the transferred assets ($80), or $1.60. The $1.60 basis reduction is allocated between Asset 1 and Asset 2 in proportion to their respective built-in losses before reduction under paragraph (b)(1) of this section. Prior to reduction, Asset 1 had a built-in loss of $50 ($120 − $70), and Asset 2 had a built-in loss of $50 ($160 − $110). As a result, the basis of Asset 1 is reduced by $.80 (50/100 × $1.60), the basis of Asset 2 is reduced by $.80 (50/100 × $1.60), and Y receives Asset 1 with a basis of $119.20 ($120 − $.80) and Asset 2 with a basis of $159.20 ($160 − $.80).
(v)*Retained stock and securities with a section 362(e)(2)(C) election.*
(A)The facts are the same as in paragraph (iv)(A) of this *Example 4* , except that X and Y elect to apply section 362(e)(2)(C) to reduce X's basis in its retained Y stock and retained Y securities.
(B)*Analysis.* Under paragraph (b)(6) of this section, section 362(e)(2) applies to X's transfer of assets to Y in exchange for the Y stock and the Y securities to the extent X does not distribute the Y stock and Y securities without the recognition of gain or loss. Under paragraph
(c)of this section, the election to apply section 362(e)(2)(C) applies to both the retained Y stock and the retained Y securities. Accordingly, under paragraph (c)(3) of this section, X reduces its basis in the retained Y stock and the retained Y securities by the amount Y would have been required to reduce its basis in the transferred assets had the election to apply section 362(e)(2)(C) not been made. As described in paragraph (iv)(B) of this *Example 4* , under paragraphs (b)(1) and (b)(6) of this section, Y would have been required to reduce its basis in the transferred assets by $1.60. Accordingly, X is required to reduce its basis in the retained Y stock and Y securities by $1.60, and, under paragraph (c)(4) of this section, this $1.60 basis reduction is allocated between the retained Y stock and Y securities in proportion to fair market value. Because X retained Y stock and Y securities with equal values, X holds the retained Y stock with an adjusted basis of $1.70 ((($500/2) × .01) − $.80) and the retained Y securities with an adjusted basis of $1.70 ((($500/2) × .01) − $.80). Example 5. *Transfer of contingent liabilities subject to section 358(h)(2)(A) with section 362(e)(2)(C) election.*
(i)*Facts.* Corporation P owns Asset 1 with a basis of $800 and a fair market value of $700. Asset 1 constitutes a trade or business for purposes of section 358(h)(2)(A). Contingent liabilities of $200 are associated with the Asset 1 business. P transfers Asset 1 to newly formed corporation S in exchange for all of the S stock and assumption of the contingent liabilities in a transaction qualifying under section 351. P and S elect to apply section 362(e)(2)(C).
(ii)*Analysis.* Under section 362(a), S would otherwise receive Asset 1 with a basis of $800, which exceeds it fair market value of $700. As a result, Asset 1 has a net built-in loss of $100, and this section applies to the transfer. Under paragraph (c)(3) of this section, P reduces its basis in the S stock received by the amount S would have been required to reduce its basis in Asset 1 had the election to apply section 362(e)(2)(C) not been made ($100). Accordingly, A receives S stock with an aggregate basis of $700, and, under section 362(a), S receives Asset 1 with a basis of $800. Example 6. *Property transfer qualifying under section 351 with boot.*
(i)*Facts.* Individual A owns Asset 1 with a basis of $80 and a fair market value of $100, and Asset 2 with a basis of $30 and a fair market value of $25. In a transaction qualifying under section 351, A transfers Asset 1 and Asset 2 to newly formed corporation N in exchange for 10 shares of N stock and $25. A and N do not elect to apply section 362(e)(2)(C) to reduce A's basis in the N stock received.
(ii)*Analysis.* Under paragraph (b)(4)(iii) of this section, for purposes of determining whether the transferred property has a net built-in loss in the hands of the transferee, the transferee's basis in the transferred property must be adjusted for any gain recognized by the transferor on the transfer. Section 351(b) requires transferors in transactions otherwise qualifying under section 351(a) for nonrecognition treatment to recognize gain (but not loss) to the extent the transferor receives other property or money in addition to the stock permitted to be received. For purposes of computing the amount of gain recognized under section 351(b), the consideration is allocated pro rata among the transferred properties according to their fair market values. As a result, to compute the amount of gain recognized on the transfer, A is treated as having received eight shares of N stock and $20 in exchange for Asset 1, and two shares of N stock and $5 in exchange for Asset 2. Under section 351(b), A must recognize $20 of gain for the cash received in exchange for Asset 1. Thus, under section 362(a), N would otherwise have a basis of $100 in Asset 1 and $30 in Asset 2. N's total basis in Asset 1 and Asset 2 of $130 ($100 + $30) would exceed the total fair market value of Asset 1 and Asset 2 of $125 ($100 + $25). As a result, this section applies to the transfer. Under paragraph (b)(1) of this section, N reduces its basis in Asset 2 by $5 to $25 and, under section 362(a), takes a basis in Asset 1 of $100. Under section 358(a), A receives N stock with a basis of $105. Example 7. *Property transfer subject to both sections 362(e)(1) and 362(e)(2).*
(i)*Facts.* Foreign corporation FP transfers Asset 1 and Asset 2 to a domestic corporation DS in a transaction that qualifies under section 351. Asset 1 is not property described in section 362(e)(1)(B) and has a basis of $80 and a fair market value of $50. Asset 2 is property described in section 362(e)(1)(B) and has a basis of $120 and a value of $110. Section 367(b) does not apply to the transfer of Asset 1 or Asset 2.
(ii)*Analysis* . Under paragraphs (b)(1) and (b)(3) of this section, a transfer is described in section 362(e)(1), and thus not subject to this section, only if and to the extent there is a transfer of property described in section 362(e)(1)(B) that otherwise would have a net built-in loss in the hands of the transferee. Because Asset 2 is property described in section 362(e)(1)(B) and DS would otherwise receive Asset 2 with a basis of $120 and a value of $110, FP's transfer of property to DS is described in section 362(e)(1) only to the extent of the transfer of Asset 2. Asset 1 is not property described in section 362(e)(1)(B), and under section 362(a), DS would receive Asset 1 with a basis ($80) in excess of its fair market value ($50). Accordingly, this section applies solely to the transfer of Asset 1. Under paragraph (b)(1) of this section, DS reduces its basis in Asset 1 by $30 to $50. Under section 358(a), FP receives the DS stock with a basis of $200. Example 8. *Section 304 sale of built-in loss stock.*
(i)*Facts.* Individual A owns all the stock of corporation X and corporation Y. A sells all his X stock to Y for $60. Under section 304, A is treated as though he transferred the X stock to Y in exchange for Y stock in a transaction to which section 351 applies. Then, Y is treated as redeeming the Y stock it was treated as having issued to A in the section 351 transaction. At the time of the transaction, A holds X stock with a basis of $90 and a fair market value of $60. A and Y do not elect to apply section 362(e)(2)(C) to reduce A's basis in the Y stock deemed received.
(ii)*Analysis.* Under section 362(a), Y would otherwise receive X stock with an aggregate basis of $90, which exceeds its aggregate fair market value of $60. As a result, the X stock has a net built-in loss of $30, and, under paragraph (b)(1) of this section, Y reduces its basis in the X stock received by $30 to $60. Under section 358(a), A receives the deemed issued Y stock with a basis of $90.
(e)*Effective date.* This section applies to transactions occurring after the date these regulations are published as final regulations in the **Federal Register** . **Par. 5.** Section 1.705-1(a)(9) is added to read as follows: § 1.705-1 Determination of basis of partner's interest.
(a)* * *
(9)For basis adjustments necessary to coordinate sections 705 and 362(e)(2), see § 1.362-4(c)(6). **Par. 6.** In § 1.1367-1, a new sentence is added at the end of paragraph (c)(2) to read as follows: § 1.1367-1 Adjustments to basis of shareholder's stock in an S corporation.
(c)* * *
(2)* * * For basis adjustments necessary to coordinate sections 1367 and 362(e)(2), see § 1.362-4(c)(7). Mark E. Matthews, Deputy Commissioner for Services and Enforcement. [FR Doc. E6-17649 Filed 10-20-06; 8:45 am] BILLING CODE 4830-01-P DEPARTMENT OF HOMELAND SECURITY Coast Guard 33 CFR Part 165 [USCG-2006-25767; CGD09-06-123] Safety Zones; U.S. Coast Guard Water Training Areas, Great Lakes AGENCY: Coast Guard, DHS. ACTION: Notice of public meetings. SUMMARY: This document provides the times and locations of for the additional public meetings which will be held by the Coast Guard to discuss issues relating to the proposed permanent safety zones located in the Great Lakes to conduct live gunnery training exercises. These meetings will be open to the public and are in addition to the four currently scheduled public meetings. DATES: The Coast Guard will hold five additional public meetings as follows: Monday, October 30, 2006 in Rochester, NY; Wednesday November 1, Waukegan, IL (Milwaukee, WI / Chicago, IL area); Friday November 3, in Charlevoix, MI; Monday, November 6, in Erie, PA; and Wednesday, November 8, Sturgeon Bay, WI. If you are unable to attend, you may submit comments to the Docket Management Facility by November 13, 2006. ADDRESSES: The Coast Guard will hold additional public meetings at the following addresses: 1. Rochester, NY: Rochester Fast Ferry Terminal, 1000 N. River Street, Rochester, NY 14612,
(877)283-7327; 2. Chicago, IL/ Milwaukee, WI: Genesee Theatre, 203 N. Genesee Street, Waukegan, IL 60085,
(847)782-2366; 3. Charlevoix, MI: Charlevoix Public Library, 220 W. Clinton Street, Charlevoix, MI 49720,
(231)547-2651; 4. Erie, PA: Port of Erie Cruise Boat Terminal, 1 Holland Street, Erie PA 16507,
(814)455-7557; and 5. Sturgeon Bay, WI: Stoneharbor Resort, 107 North First Avenue, Sturgeon Bay, WI
(877)746-0700. You may submit your comments and related material by one of the following means:
(1)By mail to the Docket Management Facility (USCG-2006-2567), U.S. Department of Transportation, room PL-401, 400 Seventh Street, SW., Washington, DC 20590-0001.
(2)By delivery to room PL-401 on the Plaza level of the Nassif Building, 400 Seventh Street, SW., Washington, DC between 9 a.m. and 5 p.m. Monday through Friday, except Federal holidays. The telephone number is 202-366-9329.
(3)By fax to the Docket Management Facility at 202-493-2251.
(4)Electronically through the Web site for the Docket Management System at *http://dms.dot.gov.* The Docket Management Facility maintains the public docket for the rulemaking. Comments and material received from the public will become part of this docket and will be available for inspection or copying at room PL-401, located on the Plaza level of the Nassif Building at the same address between 9 a.m. and 5 p.m., Monday through Friday, except Federal holidays. You may electronically access the public docket by performing a “Simple Search” for docket number 25767 on the Internet at *http://dms.dot.gov.* Electronic forms of all comments received into any of our dockets can be searched by the name of the individual submitting the comment (or signing the comment, if submitted on behalf of an association, business, labor unit, etc.) and is open to the public without restriction. You may review the Department of Transportation's complete Privacy Act Statement in the **Federal Register** published on April 11, 2000 (65 FR 19477-78), or you may visit *http://dms.dot.gov.* FOR FURTHER INFORMATION CONTACT: For further information concerning this notice and the public meeting, contact Commander Gustav Wulfkuhle, Chief Enforcement Branch, Ninth Coast Guard District, Cleveland, Ohio at
(216)902-6091. If you have any questions on viewing or submitting material to the docket, call Renee V. Wright, Program Manager, Docket Operations, telephone 202-493-0402. SUPPLEMENTARY INFORMATION: Public Meetings The Coast Guard will hold five additional public meetings as follows: Monday, October 30, 2006 in Rochester, NY; Wednesday November 1, Waukegan, IL (Milwaukee, WI/Chicago, IL area); Friday, November 3, in Charlevoix, MI; Monday, November 6, in Erie, PA; and Wednesday, November 8, in Sturgeon Bay, WI. These meetings will be held to take comments regarding the proposed Safety Zones; U.S. Coast Guard Water Training Areas, Great Lakes, published on August 1, 2006, in the **Federal Register** at 71 FR 43402. The Coast Guard encourages interested persons to submit written data, views, or comments. Persons submitting comments should please include their name and address and identify the docket number (USCG-2006-25767). You may submit your comments and material by mail, hand delivery, fax or electronic means to the Docket Management Facility at the address under ADDRESSES. Regulatory History On August 1, 2006, the Coast Guard published a notice of proposed rulemaking
(NPRM)(71 FR 43402) to establish permanent safety zones throughout the Great Lakes, which would restrict vessels from portions of the Great Lakes during live fire gun exercises that will be conducted by Coast Guard cutters and small boats. The initial comment period for this NPRM ended on August 31, 2006. In response to public requests, the Coast Guard re-opened the comment period on this NPRM. (71 FR 53629, September 12, 2006) Re-opening the comment period from September 12, 2006 to November 13, 2006, provides the public more time to submit comments and recommendations. On September 19, 2006, the Coast Guard published a brief document announcing the dates of public meetings. (71 FR 54792) On September 27, 2006 we published a document containing detailed information about the first set of meetings. (71 FR 56420) On October 12, 2006, the Coast Guard announced that the addition of three more public meetings and again stated that more detailed information related to the meetings would be published at a later date. (71 FR 60094) This document provides detailed information regarding these additional meetings by providing the locations of the public meetings and the topics to be discussed. We are also announcing the addition of public meetings to be held in Erie, PA and Sturgeon Bay, WI. Background and Purpose The thirty-four permanent safety zones proposed in the NPRM will be located throughout the Great Lakes in order to accommodate the training needs of 57 separate Coast Guard units. The proposed safety zones are all located more than three nautical miles from the shoreline. Establishing permanent training areas serves to notify the public and solicit its input on selection of the training locations. The proposed safety zones will be enforced only when training is conducted, and then only after notice by the Captain of the Port for the area in which the exercise will be held. The Captain of the Port will use all appropriate means to effect the widest publicity among the affected segments of the public, including publication in the **Federal Register** if practicable, in accordance with 33 CFR 65.7(a). Such means of notification may also include, but are not limited to, Broadcast Notice to Mariners or Local Notice to Mariners. The appropriate Captain of the Port will also issue a Broadcast Notice to Mariners and Local Notice to Mariners notifying the public when enforcement of a live fire exercise safety zone is suspended. Interested individuals are encouraged to attend the open house forums and public meetings, provide comments and ask questions about the weapons training areas. In the event that the Coast Guard decides to conduct a higher level of environmental analysis pursuant to the National Environmental Policy Act, input received from all nine public meetings in the Great Lakes area will serve as “scoping,” to determine the issues to be addressed in that analysis. Meeting Times and Topics The meetings are expected to run from 5:30 p.m. to 8 p.m. (local). We may end the meetings early if there are no additional comments or questions. Topics to be covered during the public meetings include the following:
(1)Introduction of the proposed zones and the need to train on the Great Lakes;
(2)How the Coast Guard determined the locations of the zones;
(3)Scheduling and frequency of training in the zones;
(4)Notification procedures;
(5)Safety procedures;
(6)Weapons and munitions; and
(7)Environmental risk assessment overview. Before the start of the formal public meetings, from 4 p.m. to 5:30 p.m. (local), the Coast Guard is hosting an open house so that the public can speak with Coast Guard personnel and obtain more information on the proposed zones. Procedure Each open house and meeting is open to the public. Ideally, comments will provide specific information and facts related to the impact of the zone(s) on the commenter. Detailed and focused comments will enable the Coast Guard to address identified areas of concern in the rulemaking process. Please note that the meeting may close early if all business is finished. If you are unable to attend, you may submit comments to the Docket Management Facility at the address under ADDRESSES by November 13, 2006. Information on Services for Individuals With Disabilities If you plan to attend any of the public meetings and require special assistance, such as sign language interpretation or other reasonable accommodations, please contact us as indicated in FOR FURTHER INFORMATION CONTACT. Dated: October 18, 2006. John E. Crowley, Jr., Rear Admiral, U.S. Coast Guard, Commander, Ninth Coast Guard District. [FR Doc. 06-8849 Filed 10-19-06; 3:10 pm]
Connectionstraces to 8
Traces to 8 documents
12 references not yet in our index
- 14 CFR 1266
- Pub. L. 85-568
- 42 USC 2458c
- Pub. L. 109-155
- 42 USC 2473
- Pub. L. 106-387
- 50 USC 1701-1706
- 26 CFR 1
- Pub. L. 108-357
- 188 Stat. 1418
- 33 CFR 165
- 33 CFR 65.7(a)
Citation graph
cites case law
Rules and Regulations
Notice of proposed rulemaking
Cite14 CFR 1266
Pub. L.Pub. L. 85-568
Cite42 USC 2458c
Pub. L.Pub. L. 109-155
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