For Tax Professionals  
REG-120882-97 January 26, 1998

Continuity of Interest

DEPARTMENT OF THE TREASURY
Internal Revenue Service 26 CFR Part 1 [REG-120882-97] RIN 1545-AV81

TITLE: Continuity of Interest

AGENCY: Internal Revenue Service (IRS), Treasury.

ACTION: Notice of proposed rulemaking by cross-reference to
temporary regulations and notice of public hearing.

SUMMARY: The IRS is issuing temporary regulations published
elsewhere in this issue of the Federal Register providing guidance
regarding satisfaction of the continuity of interest requirement for
corporate reorganizations. The temporary regulations affect
corporations and their shareholders. The text of those temporary
regulations also serves as the text of these proposed regulations.
In addition, this document provides notice of a public hearing on
these proposed regulations.

DATES: Written comments and outlines of topics to be discussed at
the hearing scheduled for Tuesday, May 26, 1998, must be received by
Tuesday, May 5, 1998.

ADDRESSES: Send submissions to: CC:DOM:CORP:R (REG-120882-97), room
5226, Internal Revenue Service, POB 7604, Ben Franklin Station,
Washington, DC 20044. Submissions may be hand delivered between the
hours of 8 a.m. and 5 p.m. to CC:DOM:CORP:R (REG-120882-97),
Courier's Desk, Internal Revenue Service, 1111 Constitution Avenue
NW., Washington, DC. Alternatively,.taxpayers may submit comments
electronically via the Internet by selecting the "Tax Regs" option
on the IRS Home Page, or by submitting comments directly to the IRS
Internet site at
http://www.irs.ustreas.gov/prod/tax_regs/comments.html. The public
hearing will be held in room 2615, Internal Revenue Building, 1111
Constitution Avenue NW., Washington, DC.

FOR FURTHER INFORMATION CONTACT: Concerning the regulations, Phoebe
Bennett, (202) 622-7750; concerning submissions and the hearing,
LaNita Van Dyke, (202) 622-7190 (not toll-free numbers).

SUPPLEMENTARY INFORMATION:

Background

Temporary regulations published elsewhere in this issue of the
Federal Register amend the Income Tax Regulations (26 CFR part 1)
under section 368. The temporary regulations provide that in
determining whether the continuity of interest requirement for
corporate reorganizations is satisfied with respect to a potential
reorganization, a proprietary interest in the target corporation is
not preserved if, in connection with a potential reorganization, it
is redeemed or acquired by a person related to the target
corporation, or to the extent that, prior to and in connection with
a potential reorganization, an extraordinary distribution is made
with respect to it.

The text of the temporary regulations also serves as the text of
these proposed regulations. The preamble to the temporary
regulations describes the temporary regulations.

The temporary regulations do not provide guidance on the
determination of whether a distribution will be treated as an
extraordinary distribution, except that the rules of section 1059 do
not apply for this purpose. The IRS and Treasury Department invite
comments on whether the regulations should provide more specific
guidance in this area.

Special Analyses

It has been determined that this notice of proposed rulemaking is
not a significant regulatory action as defined in EO 12866.
Therefore, a regulatory assessment is not required.

It also has 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 regulation does 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 Internal Revenue Code, this notice of
proposed rulemaking will be submitted to the Chief Counsel for
Advocacy of the Small Business Administration for comment on its
impact on small business.

Comments and Public Hearing

Before these proposed regulations are adopted as final regulations,
consideration will be given to any comments that are submitted
timely to the IRS. All comments will be available for public
inspection and copying.

A public hearing has been scheduled at 10 a.m. on Tuesday, May 26,
1998, in room 2615, Internal Revenue Service, 1111 Constitution
Avenue NW., Washington, DC. Because of access restrictions, visitors
will not be admitted beyond the Internal Revenue Building lobby more
than 15 minutes before the hearing.starts.

The rules of 26 CFR 601.601(a)(3) apply to the hearing.

Persons that wish to present oral comments at the hearing must
submit written comments by Tuesday, May 5, 1998 and submit an
outline of the topics to be discussed and the time to be devoted to
each topic (a signed original and eight (8) copies) by Tuesday, May
5, 1998.

A period of 10 minutes will be allotted to each person for making
comments.

An agenda showing the scheduling of the speakers will be prepared
after the deadline for receiving outlines has passed.

Copies of the agenda will be available free of charge at the
hearing.

Proposed Effective Date

These regulations are proposed to apply to transactions occurring
after January 28, 1998, except that they do not apply to any
transaction occurring pursuant to a written agreement which is
(subject to customary conditions) binding on January 28, 1998, and
at all times thereafter.

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 continues to read in
part as follows:.Authority: 26 U.S.C. 7805. * * *

Par. 2. Section 1.368-1 is amended as follows:

1. Revising paragraphs (e)(1)(ii)(A), (e)(1)(ii)(B), (e)(2)(ii), and
(f).

2. Adding paragraph (e)(6) Example 10 and Example 11.

The addition and revisions read as follows:

1.368-1 Purpose and scope of exception of reorganization exchanges.

[The text of proposed paragraphs (e)(1)(ii)(A) and (B), (e)(2)(ii),
(e)(6) Example 10 and Example 11, and (f) is the same as the text of
1.368-1T published elsewhere in this issue of the Federal
Register].

Michael P. Dolan
Deputy Commissioner of Internal Revenue


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