Guidance Under Section 356 Relating to the Treatment of
Nonqualified Preferred Stock & Other Preferred
Stock in Certain Exchanges & Distributions

DEPARTMENT OF THE TREASURY
Internal Revenue Service 26 CFR Part 1 [REG-105089-99] RIN 1545-AX38

TITLE: Guidance Under Section 356 Relating to the Treatment of
Nonqualified Preferred Stock and Other Preferred Stock in Certain
Exchanges and Distributions

AGENCY: Internal Revenue Service (IRS), Treasury.

ACTION: Notice of proposed rulemaking and notice of public hearing.

SUMMARY: This document contains proposed regulations providing
guidance relating to nonqualified preferred stock. The proposed
regulations address the effective date of the definition of
nonqualified preferred stock and the treatment of nonqualified
preferred stock and similar preferred stock received by shareholders
in certain reorganizations and distributions. This document also
provides notice of a public hearing on these proposed regulations.

DATES: Written or electronic comments and requests to speak (with
outlines of oral comments) at a public hearing scheduled for 10
a.m., May 31, 2000, must be received by May 10, 2000.

ADDRESSES: Send submissions to: CC:DOM:CORP:R (REG-105089-99), Room
5226, Internal Revenue Service, POB 7604, Ben Franklin Station,
Washington, DC 20044. Submissions may be hand delivered Monday
through Friday between the hours of 8 a.m. and 5 p.m. to:
CC:DOM:CORP:R (REG-105089-99), 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/tax_regs/regslist.html. The public
hearing will be held in the NYU Classroom, Room 2615, Internal
Revenue Building, 1111 Constitution Avenue, NW., Washington, DC.

FOR FURTHER INFORMATION CONTACT: Concerning the proposed
regulations, Richard E. Coss, (202) 622-7790; concerning submissions
of comments, the hearing, and/or to be placed on the building access
list to attend the hearing, LaNita Van Dyke, (202) 622-7180 (not
toll-free numbers).

SUPPLEMENTARY INFORMATION:

Background

This document contains proposed amendments to the Income Tax
Regulations (26 CFR part 1) under sections 354, 355, 356, and 1036
of the Internal Revenue Code (the Code). Section 1014 of the
Taxpayer Relief Act of 1997 (TRA of 1997), Public Law 105-34,
enacted on August 5, 1997, amended sections 351, 354, 355, 356, and
1036 of the Code. As amended, these sections, in general, provide
that nonqualified preferred stock (as defined in section 351(g)(2))
(NQPS) received in an exchange or distribution will not be treated
as stock or securities but, instead, will be treated as "other
property" or "boot." As a result, the receipt of NQPS in a
transaction occurring after the NQPS provisions are effective will,
unless a specified exception applies, result in gain (or, in some
instances, loss) recognition. Section 351(g)(4) provides authority
to issue regulations to carry out the purposes of these provisions.

Section 351(g)(2)(A) defines NQPS as preferred stock if (1) the
holder has the right to require the issuer or a related person to
redeem or purchase the stock, (2) the issuer or a related person is
required to redeem or purchase the stock, (3) the issuer or a
related person has the right to redeem or purchase the stock and, as
of the issue date, it is more likely than not that such right will
be exercised, or (4) the dividend rate on the stock varies in whole
or in part (directly or indirectly) with reference to interest
rates, commodity prices, or other similar indices. Factors (1), (2),
and (3) above will cause an instrument to be NQPS only if the right
or obligation may be exercised within 20 years of the date the
instrument is issued and such right or obligation is not subject to
a contingency which, as of the issue date, makes remote the
likelihood of the redemption or purchase.

These rights or obligations do not cause preferred stock to be NQPS
in certain circumstances described in section 351(g)(2)(C). In one
such exception, contained in section 351(g)(2)(C)(i)(II), a
redemption or purchase right shall not cause stock to be NQPS if the
stock containing the right is transferred in connection with the
performance of services for the issuer or a related person (and
represents reasonable compensation), and the right may be exercised
only upon the holder's separation from service.

The NQPS provisions also provide certain exceptions to the treatment
of NQPS as boot. Under sections 354(a)(2)(C), 355(a)(3)(D), and
356(e)(2), NQPS is treated as stock, and not other property, in
cases where the NQPS is received in exchange for, or in a
distribution with respect to, NQPS. As a result, the receipt of NQPS
in exchange for NQPS will not result in gain or loss recognition.

Under prior law, preferred stock generally did not constitute boot
in a reorganization or in a distribution under section 355 of the
Code. The legislative history of the NQPS provisions indicates that
Congress was concerned about nonrecognition transactions in which a
secure preferred stock instrument is received in exchange for common
stock or riskier preferred stock. The committee reports state that
"[c]ertain preferred stocks have been widely used in corporate
transactions to afford taxpayers non-recognition treatment, even
though the taxpayers may receive relatively secure instruments in
exchange for relatively risky investments," and that "[t]he
Committee believes that when such preferred stock instruments are
received in certain transactions, it is appropriate to view such
instruments as taxable consideration, since the investor has often
obtained a more secure form of investment." H.R. Rep. No. 148, 105
Cong., 1 Sess. 472 (1997); S. Rep. 33, 105 Cong., 1 Sess. (1997). th
st th st The NQPS provisions apply to transactions after June 8,
1997, but will not apply to any transaction (1) made pursuant to a
written agreement which was binding on such date and at all times
thereafter, (2) described in a ruling request submitted to the IRS
on or before such date, or (3) described in a public announcement or
filing with the Securities and Exchange Commission on or before such
date. Section 1014(f) of TRA of 1997.

A temporary regulation published as T.D. 8753 in the Federal
Register on January 6, 1998, provides that, notwithstanding
contemporaneously issued final regulations treating certain rights
to acquire stock as securities that can be received tax-free in
reorganizations and section 355 distributions, a right to acquire
NQPS received in exchange for stock other than NQPS (or for a right
to acquire stock other than NQPS) will not be treated as a security,
and that NQPS received in exchange for stock other than NQPS (or for
a right to acquire stock other than NQPS) will not be treated as
stock or a security. The temporary regulation added �1.356-6T, and
applies to NQPS (or a right to acquire such stock) received in
connection with a transaction occurring on or after March 9, 1998
(other than transactions described in section 1014(f)(2) of TRA of
1997).

Explanation of Provisions

The proposed regulations address three technical issues relating to
the question of whether certain preferred stock instruments qualify
as NQPS. The first issue addressed by the proposed regulations is
whether stock described in section 351(g)(2) that was issued in a
transaction on or before June 8, 1997, qualifies as NQPS (even
though the receipt of such stock would not have been boot because
the transaction in which it was received occurred prior to the NQPS
provisions' effective date). Although the NQPS provisions generally
are effective with respect to transactions occurring after June 8,
1997, neither the effective date provisions of section 1014(f) of
TRA of 1997 nor the legislative history of the NQPS provisions
addresses this issue.

The proposed regulations provide that stock described in section
351(g)(2) is NQPS regardless of the date on which the stock is
issued. The IRS and Treasury believe that this represents the proper
interpretation of the NQPS provisions; a contrary interpretation
would give rise to results that are inconsistent with other NQPS
provisions and their underlying policy.

For example, assume that corporation (T) issues preferred stock
described in section 351(g)(2) to shareholder (X) in 1996, and that
X surrenders the T stock and receives NQPS of acquiring corporation
(P) in a reorganization occurring after June 8, 1997 (when the NQPS
provisions are effective). If the T preferred stock received in 1996
is not NQPS, X will recognize gain (if any) on the exchange. This
result is unwarranted, because X is not receiving a more secure type
of investment for a relatively risky type of investment, and
exchanges of NQPS for NQPS are otherwise governed by the
nonrecognition rules of sections 354, 355, and 356.

The second issue addressed by the proposed regulations is the
treatment of NQPS received in a reorganization in exchange for (or
in a distribution with respect to) preferred stock that is not NQPS
solely because, at the time the original stock was issued, a
redemption or purchase right was not exercisable until after a 20-
year period beginning on the issue date, or a redemption or purchase
right was exercisable within a 20- year period but was subject to a
contingency which made remote the likelihood of the redemption or
purchase, or, in the case of an issuer's right to redeem or purchase
stock described in section 351(g)(2)(A)(iii), was unlikely to be
exercised within a 20-year period beginning on the issue date (or
because of any combination of these reasons). To illustrate, assume
that after June 8, 1997, T issues preferred stock to X that permits
the holder to require T to redeem the stock on demand, but not
before the stock is held for 22 years. Assume that seven years
later, the T stock is exchanged in a reorganization for P preferred
stock with substantially identical terms that permits the holder to
require P to redeem the stock after 15 years.

Technically, this transaction could be viewed as a taxable exchange
because X is receiving P stock that meets the definition of NQPS in
exchange for T stock that is not NQPS (QPS). However, the IRS and
Treasury believe that nonrecognition treatment is appropriate
because the P stock represents a continuation of the original
investment in the T stock.

The proposed regulations provide a rule that treats the P stock
received in such transactions as QPS if the P stock is substantially
identical to the T preferred stock surrendered (or the T stock on
which a distribution is made). The substantially identical
requirement is necessary to ensure that this rule does not permit
the NQPS provisions to be circumvented through exchanges of QPS for
more secure NQPS. The P stock is considered to be substantially
identical to the T stock if two conditions are met. The first
condition is that the P stock does not contain any terms which, in
relation to the terms of the T stock, decrease the period in which a
redemption or purchase right will be exercised, increase the
likelihood that such a right will be exercised, or accelerate the
timing of the returns from the stock instrument (including the
receipt of dividends or other distributions). The second condition
is that, as a result of the receipt of P stock in the transaction,
the exercise of the right or obligation does not become more likely
than not to occur within a 20-year period beginning on the issue
date of the T stock. To illustrate the two conditions, if the P
stock contains a term that permits the stock to be redeemed before
the date on which the T stock could be redeemed, or if, at the time
of the transaction, the T stock is not more likely than not to be
redeemed within a 20-year period beginning on the issue date of the
T stock but the P stock is more likely than not to be redeemed
within a 20-year period beginning on the issue date of the T stock,
the P stock is not substantially identical to the T stock.

Under this rule, the P stock received will continue to be treated as
QPS in subsequent transactions, and similar principles will apply to
those transactions. For example, if the P stock is later exchanged
in a reorganization for substantially identical stock of another
acquiring corporation, the acquiring corporation stock will also be
treated as QPS. However, if the P stock is later exchanged for stock
described in section 351(g)(2) that is not substantially identical,
the receipt of the stock will be treated as boot.

The third issue addressed by the proposed regulations is how to
interpret the provision that exempts from the definition of NQPS
certain preferred stock containing a purchase or redemption right
that may only be exercised on the holder's separation from service
(compensation stock). To be exempted from the definition of NQPS
under this provision, stock must be "transferred in connection with
the performance of services" and must represent "reasonable
compensation." A commentator has questioned how these requirements
apply in the context of a reorganization or distribution. The
concern is that, when an employee of T receives P preferred stock in
a reorganization in exchange for T stock of equal value, the P stock
received could be considered transferred in exchange for stock
(rather than for services), or could be considered not to represent
reasonable compensation (because the P stock received in the equal
value exchange represents no additional compensation to the
employee).

The legislative history of the NQPS provisions does not address
these ambiguities. The IRS and Treasury believe that the exemption
for compensation stock is intended to apply in situations where an
employee previously received compensation stock and then surrenders
that stock in a reorganization in exchange for new compensation
stock containing a similar purchase or redemption right that can
only be exercised upon separation from service. The proposed
regulations provide a rule that treats the P preferred stock
received in such transactions as satisfying the "transferred in
connection with the performance of services" and the "reasonable
compensation" requirements if the T stock surrendered (or the T
stock on which a distribution is made) was originally transferred to
the T employee in connection with the performance of services and
represented reasonable compensation at the time of the transfer.
This rule applies regardless of whether the T stock is common or
preferred stock. No inference is intended regarding the meaning of
the phrases "transferred in connection with the performance of
services" and "reasonable compensation" for purposes other than the
exemption from the definition of NQPS in section 351(g)(2)(C)(i)
(II). The proposed regulations also provide that the principles of
the rules described above apply to transactions involving rights to
acquire NQPS that are subject to �1.356-6T.

Proposed Effective Date

The proposed regulations are proposed to be effective for
transactions on the date that final regulations are published in the
Federal Register . Notwithstanding the prospective effective date of
the proposed regulations, the IRS and Treasury believe that the
regulations prescribe the proper treatment of the transactions they
address, and the IRS generally will not challenge return positions
consistent with the regulations. However, a transaction involving
rights to acquire NQPS that occurs before the effective date of
�1.356-6T will be treated in accordance with the law governing
rights to acquire stock in effect at that time.

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
Procedures 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
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 written comments (preferably a
signed original and eight (8) copies, if written) that are submitted
timely (in the manner described in the ADDRESSES portion of this
preamble) to the IRS. The IRS and Treasury specifically request
comments on the clarity of the proposed regulations and how the
regulations may be made easier to understand. All comments will be
available for public inspection and copying.

A public hearing has been scheduled for May 31, 2000, beginning at
10 a.m., in the NYU Classroom, Room 2615, Internal Revenue Building,
1111 Constitution Avenue, NW., Washington, D.C. Due to building
security procedures, visitors must enter at the 10 Street entrance,
located between Constitution and Pennsylvania th Avenues, NW. In
addition, all visitors must present photo identification to enter
the building. Because of access restrictions, visitors will not be
admitted beyond the immediate entrance area more than 15 minutes
before the hearing starts. For information about having your name
placed on the hearing access list to attend the hearing, see the
"FOR FURTHER INFORMATION CONTACT" section of this preamble.

The rules of 26 CFR 601.601(a)(3) apply to the hearing. Persons who
wish to present oral comments at the hearing must request to speak,
and submit written comments and an outline of the topics to be
discussed and the time to be devoted to each topic (signed original
and eight (8) copies) by May 10, 2000. 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.

Drafting Information

The principal author of these proposed regulations is Richard E.
Coss, Office of Assistant Chief Counsel (Corporate). However, other
personnel from the IRS and Treasury 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
the following entries in numerical order to read in part as follows:
Authority: 26 U.S.C. 7805 * * *

Section 1.354-1 also issued under 26 U.S.C. 351(g)(4).
Section 1.355-1 also issued under 26 U.S.C. 351(g)(4). * * *
Section 1.356-7 also issued under 26 U.S.C. 351(g)(4). * * *
Section 1.1036-1 also issued under 26 U.S.C. 351(g)(4). * * *
Par. 2. Section 1.354-1 is amended by adding paragraph (f) as follows:
�1.354-1 Exchanges of stock and securities in certain reorganizations.

* * * * *

(f) Nonqualified preferred stock. See �1.356-7(a) and (b) for the
treatment of nonqualified preferred stock (as defined in section
351(g)(2)) received in certain exchanges for nonqualified preferred
stock or preferred stock. See �1.356-7(c) for the treatment of
preferred stock received in certain exchanges for common or
preferred stock described in section 351(g)(2)(C)(i)(II). Par. 3.
Section 1.355-1 is amended by adding paragraph (d) as follows:
�1.355-1 Distributions of stock and securities of a controlled
corporation.

* * * * *

(d) Nonqualified preferred stock. See �1.356-7(a) and (b) for the
treatment of nonqualified preferred stock (as defined in section
351(g)(2)) received in certain exchanges for (or in certain
distributions with respect to) nonqualified preferred stock or
preferred stock. See �1.356-7(c) for the treatment of the receipt of
preferred stock in certain exchanges for (or in certain
distributions with respect to) common or preferred stock described
in section 351(g)(2)(C)(i)(II).

Par. 4. Section 1.356-7 is added to read as follows: � 1.356-7 Rules
for treatment of nonqualified preferred stock and other preferred
stock received in certain transactions.

(a) Stock issued prior to effective date. Stock described in section
351(g)(2) is nonqualified preferred stock (NQPS) regardless of the
date on which the stock is issued. However, sections 351(g), 354(a)
(2)(C), 355(a)(3)(D), 356(e), and 1036(b) do not apply to any
transaction occurring prior to June 9, 1997, or to any transaction
occurring after June 8, 1997, that is described in section 1014(f)
(2) of the Taxpayer Relief Act of 1997, Public Law 105-34, 111 Stat.
788, 921.

(b) Receipt of preferred stock in exchange for (or distribution on)
substantially identical preferred stock --- (1) General rule. For
purposes of sections 354(a)(2)(C)(i), 355(a)(3)(D), and 356(e)(2),
preferred stock is not NQPS, even though it is described in section
351(g)(2), if it is received in exchange for (or in a distribution
with respect to) preferred stock (the original preferred stock) that
is not NQPS (QPS), provided ---

(i) The original preferred stock is QPS solely because, on its issue
date, a right or obligation described in clause (i), (ii), or (iii)
of section 351(g)(2)(A) was not exercisable until after a 20-year
period beginning on the issue date, the right or obligation was
exercisable within the 20-year period beginning on the issue date
but was subject to a contingency which made remote the likelihood of
the redemption or purchase, or the issuer's (or a related party's)
right to redeem or purchase the stock was not more likely than not
to be exercised within a 20-year period beginning on the issue date,
or because of any combination of these reasons; and

(ii) the stock received is substantially identical to the original
preferred stock.

(2) Substantially identical. The stock received is substantially
identical to the original preferred stock if --

(i) the stock received does not contain any term or terms which, in
relation to any term or terms of the original preferred stock,
decrease the period in which a right or obligation described in
clause (i), (ii), or (iii) of section 351(g)(2)(A) may be exercised,
increase the likelihood that such a right or obligation may be
exercised, or accelerate the timing of the returns from the stock
instrument, including the timing of actual or deemed dividends or
other distributions received on the stock; and

(ii) as a result of the exchange or distribution, exercise of the
right or obligation does not become more likely than not to occur
within a 20-year period beginning on the issue date of the original
preferred stock.

(3) Treatment of stock received. The stock received will continue to
be treated as QPS in subsequent transactions involving such stock,
and the principles of this paragraph (b) apply to such transactions
as though the stock received is the original preferred stock issued
on the same date as the original preferred stock.

(c) Stock transferred for services. For purposes of sections 354(a)
(2)(C)(i), 355(a)(3)(D), and 356(e)(2), preferred stock containing a
right or obligation described in clause (i), (ii) or (iii) of
section 351(g)(2)(A) that is exercisable only upon the holder's
separation from service from the issuer or a related person (as
described in section 351(g)(3)(B)) will be treated as transferred in
connection with the performance of services (and representing
reasonable compensation) within the meaning of section 351(g)(2)(C)
(i)(II), if such preferred stock is received in exchange for (or in
a distribution with respect to) existing stock containing a similar
right or obligation (exercisable only upon separation from service)
and the existing stock was transferred in connection with the
performance of services for the issuer or a related person (and
represented reasonable compensation when transferred). In applying
the rules relating to NQPS, the preferred stock received will
continue to be treated as transferred in connection with the
performance of services (and representing reasonable compensation)
in subsequent transactions involving such stock, and the principles
of this paragraph (c) apply to such transactions.

(d) Rights to acquire stock. For purposes of �1.356-6T, the
principles of paragraphs (a), (b), and (c) of this section apply.

(e) Examples. The following examples illustrate paragraphs (a), (b),
and (c) of this section. For purposes of the examples in this
paragraph (e), T and P are corporations, A is a shareholder of T,
and, except for in Example 1, A surrenders and receives (in addition
to the stock exchanged in the examples) common stock in the
reorganizations described.

Example 1. In 1995, A transfers property to T and receives T
preferred stock that is described in section 351(g)(2) in a
transaction under section 351. In 2002, pursuant to a reorganization
under section 368(a)(1)(B), A surrenders the T preferred stock in
exchange for P NQPS. Under paragraph (a) of this section, the T
preferred stock issued to A in 1995 is NQPS. However, because
section 351(g) does not apply to transactions occurring before June
9, 1997, the T NQPS was not "other property" within the meaning of
section 351(b) when issued in 1995. Under sections 354(a)(2)(C) and
356(e)(2), the P NQPS received by A in 2002 is not "other property"
within the meaning of section 356(a)(1)(B) because it is received in
exchange for NQPS.

Example 2. T issues QPS to A on January 1, 2000 that is not NQPS
solely because the holder cannot require T to redeem the stock until
January 1, 2022. In 2007, pursuant to a reorganization under section
368(a)(1)(A) in which T merges into P, A surrenders the T preferred
stock in exchange for P preferred stock with terms that are
identical to the terms of the T preferred stock, including the term
that the holder cannot require the redemption of the stock until
January 1, 2022. Because the P stock and the T stock have identical
terms, and because the redemption did not become more likely than
not to occur within the 20-year period that begins on January 1,
2000 (which is the issue date of the T preferred stock) as a result
of the exchange, under paragraph (b) of this section, the P
preferred stock received by A is treated as QPS. Thus, the P
preferred stock received is not "other property" within the meaning
of section 356(a)(1)(B).

Example 3. The facts are the same as in Example 2, except that, in
addition, in 2010, pursuant to a recapitalization of P under section
368(a)(1)(E), A exchanges the P preferred stock above for P NQPS
that permits the holder to require P to redeem the stock in 2020.
Under paragraph (b) of this section, the P preferred stock
surrendered by A is treated as QPS. Because the P preferred stock
received by A in the recapitalization is not substantially identical
to the P preferred stock surrendered, the P preferred stock received
by A is not treated as QPS. Thus, the P preferred stock received is
"other property" within the meaning of section 356(a)(1)(B).

Example 4. T issues preferred stock to A on January 1, 2000 that
permits the holder to require T to redeem the stock on January 1,
2018, or at any time thereafter, but which is not NQPS solely
because, as of the issue date, the holder's right to redeem is
subject to a contingency which makes remote the likelihood of
redemption on or before January 1, 2020. In 2007, pursuant to a
reorganization under section 368(a)(1)(A) in which T merges into P,
A surrenders the T preferred stock in exchange for P preferred stock
with terms that are identical to the terms of the T preferred stock.

Immediately before the exchange, the contingency to which the
holder's right to cause redemption of the T stock is subject makes
remote the likelihood of redemption before January 1, 2020, but the
P stock, although subject to the same contingency, is more likely
than not to be redeemed before January 1, 2020. Because, as a result
of the exchange of T stock for P stock, the exercise of the
redemption right became more likely than not to occur within the 20-
year period beginning on the issue date of the T preferred stock,
the P preferred stock received by A is not substantially identical
to the T stock surrendered, and is not treated as QPS. Thus, the P
preferred stock received is "other property" within the meaning of
section 356(a)(1)(B).

Example 5. The facts are the same as in Example 4, except that,
immediately before the merger of T into P in 2007, the contingency
to which the holder's right to cause redemption of the T stock is
subject makes it more likely than not that the T stock will be
redeemed before January 1, 2020. Because exercise of the redemption
right did not become more likely than not to occur within the 20-
year period beginning on the issue date of the T preferred stock as
a result of the exchange, the P preferred stock received by A is
substantially identical to the T stock surrendered, and is treated
as QPS. Thus, the P preferred stock received is not "other property"
within the meaning of section 356(a)(1)(B).

Example 6. A is an employee of T. In connection with A's performance
of services for T, T transfers to A in 2000 an amount of T common
stock that represents reasonable compensation. The T common stock
contains a term granting A the right to require T to redeem the
common stock, but only upon A's separation from service from T. In
2005, pursuant to a reorganization under section 368(a)(1)(A) in
which T merges into P, A receives, in exchange for A's T common
stock, P preferred stock granting a similar redemption right upon
A's separation from P's service. Under paragraph (c) of this
section, the P preferred stock received by A is treated as
transferred in connection with the performance of services (and
representing reasonable compensation) within the meaning of section
351(g)(2)(C)(i)(II). Thus, the P preferred stock received by A is
QPS.

(f) Effective dates. This section applies to transactions occurring
on or after the date these regulations are published as final
regulations in the Federal Register . Par. 5. Section 1.1036-1 is
amended by adding paragraph (d) as follows: �1.1036-1 Stock for
stock of the same corporation.

* * * * *

(d) Nonqualified preferred stock. See �1.356-7(a) for the
applicability of the definition of nonqualified preferred stock in
section 351(g)(2) for stock issued prior to June 9, 1997, and for
stock issued in transactions occurring after June 8, 1997, that are
described in section 1014(f) of the Taxpayer Relief Act of 1997,
Public Law 105-34, 111 Stat. 788, 921.

Deputy Commissioner of Internal Revenue 
Robert E. Wenzel

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