The final and temporary regulations (T.D. 9244, 2006-8 I.R.B. 463) that are the subject of these corrections are under sections 356, 358, and 1502 of the Internal Revenue Code.

As published, T.D. 9244 contains errors that may prove to be misleading and are in need of clarification.

Accordingly, 26 CFR Part 1 is corrected by making the following correcting amendments:

Paragraph 1. The authority citation for part 1 continues to read in part as follows:

Authority: 26 USC 7805 * * *

Par. 2. Section 1.358-1 is amended by removing the seventh and eighth sentences of paragraph (b), Example and adding the following sentence in their place to read as follows:

(a) * * *

(b) * * *

Example * * * The basis to A of the one share of stock Corporation Y is $90, that is, the adjusted basis of the one share of stock of Corporation X ($90), decreased by the sum of the cash received ($10) and the fair market value of the other property received ($30) and increased by the sum of the amount treated as a dividend ($5) and the amount treated as a gain from the exchange of property ($35). * * *

* * * * *

Par. 3. Section 1.358-2 is amended as follows:

A. By revising paragraph (a)(2)(viii).

B. By revising paragraph (2)(ii) paragraph (c) in Examples 4, 5, 6, and 11.

The corrections read as follows:

(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 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 or liabilities of the shareholder or security holder are assumed.

* * * * *

(c) * * *

Example 4. (i) * * *

(ii) Analysis. Under paragraph (a)(2)(ii) of this section and under §1.356-1(b), because the terms of the exchange do not specify that shares of Corporation Y stock or cash are received in exchange for particular shares of Class A stock or Class B stock of Corporation X, a pro rata portion of the shares of Corporation Y stock and cash received will be treated as received in exchange for each share of Class A stock and Class B stock of Corporation X surrendered based on the fair market value of such stock. Therefore, J is treated as receiving one share of Corporation Y stock and $5 of cash in exchange for each share of Class A stock of Corporation X and one share of Corporation Y stock and $5 of cash in exchange for each share of Class B stock of Corporation X. J realizes a gain of $140 on the exchange of shares of Class A stock of Corporation X, $100 of which is recognized under §1.356-1(a). J realizes a gain of $80 on the exchanges of Class B stock of Corporation X, all of which is recognized under §1.356-1(a). Under paragraph (a)(2)(i) of this section, J has 10 shares of Corporation Y stock, each of which has a basis of $2 and is treated as having been acquired on Date 1, 10 shares of Corporation Y stock, each of which has a basis of $4 and is treated as having been acquired on Date 2, and 20 shares of Corporation Y stock, each of which has a basis of $5 and is treated as having been acquired on Date 3. Under paragraph (a)(2)(vii) of this section, on or before the date on which the basis of a share of Corporation Y stock received becomes relevant, J may designate which of the shares of Corporation Y stock received have a basis of $2, which have a basis of $4, and which have a basis of $5.

Example 5. (i) * * *

(ii) Analysis. Under paragraph (a)(2)(ii) of this section and under §1.356-1(b), because the terms of the exchange specify that J receives 40 shares of stock of Corporation Y in exchange for J’s shares of Class A stock of Corporation X and $200 of cash in exchange for J’s shares of Class B stock of Corporation X and such terms are economically reasonable, such terms control.” in its place. J realizes a gain of $140 on the exchange of shares of Class A stock of Corporation X, none of which is recognized under §1.356-1(a). J realizes a gain of $80 on the exchange of shares of Class B stock of Corporation X, all of which is recognized under §1.356-1(a). * * *

Example 6. (i) * * *

(ii) Analysis. Under paragraph (a)(2)(ii) of this section and under §1.354-1(a), because the terms of the exchange specify that J receives 10 shares of stock of Corporation Y in exchange for J’s shares of Class A stock of Corporation X and a Corporation Y security in exchange for its Corporation X security and such terms are economically reasonable, such terms control. * * *

* * * * *

Example 11. (i) * * *

(ii) Analysis. Because the value of the common stock indicates that the liquidation preference associated with the Corporation Y preferred stock could be satisfied even if the reorganization did not occur, it is not appropriate to deem the issuance of additional Corporation Y preferred stock. * * *

* * * * *

3. Section 1.1502-19T is amended by:

A. Revising the section heading.

B. Revising paragraph (b)(2) through (c).

C. Revising the text of paragraph (h)(2)(iv).

The corrections read as follows:

(a) through (c) [Reserved]. For further guidance, see §1.1502-19(a) through (c).

* * * * *

(h)(2)(iv) * * * For guidance regarding determinations of the basis of the stock of a subsidiary acquired in and intercompany reorganization on or after January 23, 2006, see paragraphs (d) and (g) Example 2 of this section.

* * * * *

4. Section 1.1502-32 is amended by revising the text of paragraph (h)(8) to read as follows:

* * * * *

(h) * * *

(h)(8) * * * Paragraph (b)(5)(ii) Example 6 of this section applies only with respect to determinations of the basis of the stock of a subsidiary on or after January 23, 2006. For determinations of the basis of the stock of a subsidiary before January 23, 2006, see §1.1502-32(b)(5)(ii) Example 6 as contained in the 26 CFR part 1 edition revised as of April 1, 2005.