[Federal Register Volume 76, Number 224 (Monday, November 21, 2011)]
[Rules and Regulations]
[Pages 71878-71880]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2011-29799]
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DEPARTMENT OF THE TREASURY
Internal Revenue Service
26 CFR Part 1
[TD 9558]
RIN 1545-BJ21
Corporate Reorganizations; Allocation of Basis in ``All Cash D''
Reorganizations
AGENCY: Internal Revenue Service (IRS), Treasury.
ACTION: Final and temporary regulations.
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SUMMARY: This document contains temporary regulations regarding the
determination of the basis of stock or securities in a reorganization
where no stock or securities of the issuing corporation is issued and
distributed in the transaction. These temporary regulations clarify
that, in certain reorganizations where no stock or securities of the
issuing corporation is issued and distributed in the transaction, the
ability to designate the share of stock of the issuing corporation to
which the basis, if any, of the stock or securities surrendered will
attach applies only to a shareholder that owns actual shares in the
issuing corporation. These temporary regulations affect corporations
engaging in such transactions and their shareholders. The text of the
temporary regulations also serves as the text of the proposed
regulations set forth in the notice of proposed rulemaking on this
subject in the Proposed Rules section in this issue of the Federal
Register.
DATES: Effective Date: These regulations are effective on November 21,
2011.
Applicability Date: For dates of applicability, see Sec. 1.358-
2T(d).
FOR FURTHER INFORMATION CONTACT: Lisa A. Fuller at (202) 622-7550 (not
a toll-free number).
SUPPLEMENTARY INFORMATION:
Background
On December 19, 2006, the IRS and the Treasury Department published
a notice of proposed rulemaking (REG-125632-06) in the Federal Register
(71 FR 75898) that included regulations under section 368 (the
Temporary Regulations). These regulations provided guidance regarding
whether the distribution requirement under sections 368(a)(1)(D) and
354(b)(1)(B) is satisfied if there is no actual distribution of stock
or securities. On December 18, 2009, the IRS and the Treasury
Department published final regulations (TD 9475) in the Federal
Register (71 FR 75879) that, in addition to providing guidance
regarding the qualification of certain transactions as reorganizations
described in section 368(a)(1)(D), amended the regulations under Sec.
1.358-2(a)(2)(iii) to provide that in the case of a reorganization in
which the property received consists solely of non-qualifying property
equal to the value of the assets transferred (as well as a nominal
share described in the final regulations), the shareholder or security
holder may designate the share of stock of the issuing corporation to
which the basis, if any, of the stock or securities surrendered will
attach. The IRS and the Treasury Department issued these regulations in
response to comments that, in a transaction where the consideration
received consists solely of cash and a nominal share, the mechanics of
preserving basis, if any, in the shares of the stock or securities
surrendered in the basis of the stock of the issuing corporation were
unclear under current law.
The IRS and the Treasury Department have become aware that some
maintain these rules, as written, could be interpreted to allow an
inappropriate allocation of basis by persons that do not own actual
shares of stock in the issuing corporation. This interpretation would
most likely be asserted in the context of a lower-tier reorganization
transaction involving corporations in two different ownership chains
that have the same ultimate indirect shareholder(s). Specifically, the
argument is that the rules could be interpreted to allow persons who do
not own actual shares of stock of the issuing corporation to allocate
the adjusted basis of the nominal share to an actual share of stock of
the issuing corporation directly owned by someone else before the
nominal share is deemed to be further transferred through the chains of
ownership to reflect the actual ownership of the target and issuing
corporations. Under this interpretation of the rules, the actual share
to which the basis was allocated could then be sold to recognize a
loss, and taxpayers would avoid losing the nominal share's basis, which
would otherwise be zero following its deemed transfer through the
chains of ownership to the actual shareholder of the issuing
corporation.
For example, assume that J owns all the stock of corporations X and
Y, and X owns all of the stock of corporation T. X has a $150 basis in
the T stock. The corporations do not join in the filing of a
consolidated return. T sells all of its assets to Y for $100 cash,
their fair market value, and liquidates. Pursuant to Sec. 1.368-2(l),
Y will be deemed to issue a nominal share of Y stock to T in addition
to the $100 actually exchanged for the T assets, and T will be deemed
to distribute the nominal share of Y stock to X. X will have a basis of
$50 in the nominal share of Y stock under section 358(a). Pursuant to
Sec. 1.368-2(l), the nominal share of Y stock is deemed to be further
transferred to J in order to reflect the actual ownership of Y. J's
basis in the nominal share of Y stock would be zero under section
301(d). However, some argue that the rule, as currently written, could
be interpreted as allowing X to allocate the $50 of basis in the
nominal share to an actual share of Y stock owned by J prior to the
nominal share of Y stock being deemed to be further distributed to J.
The IRS and the Treasury Department did not intend for the final
regulations to allow such an inappropriate allocation of basis and do
not believe the current regulations support such an allocation.
Accordingly, the IRS and the Treasury Department are proposing rules in
the Proposed Rules section in this issue of the Federal Register, to
clarify that, in certain reorganizations where no stock or securities
of the issuing corporation is issued and distributed in the
transaction, the ability to designate the share of stock of the issuing
corporation to which the basis, if any, of the stock or securities
surrendered will attach applies only to a shareholder that owns actual
shares in the issuing corporation.
Explanation of Provisions
The preamble to the final regulation noted that the IRS and the
Treasury Department believe the ability to designate any remaining
basis is consistent with current law regarding basis determination, as
a similar result would occur under Sec. 1.358-2 if an amount of
issuing corporation stock was actually issued in the transaction (74 FR
67053; 74 FR 67056; TD 9475). To complete the analogy, however, in the
case where stock is actually issued in a lower-tier transfer, such
stock would then be transferred through chains of ownership, and in the
process, if basis in the stock exceeded value, the basis in the shares
would be reduced to the fair market value of the shares in the hands of
the distributee, under section 301(d). Accordingly, in such a case,
basis in excess of the value of the issuing corporation shares would
generally be preserved only where the shareholder of the transferor
corporation does not further distribute the stock of the issuing
corporation in a transaction to which section 301 applies.
Consistent with this view, these temporary regulations clarify and
amend the final regulations (TD 9475)
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under Sec. 1.358-2(a)(2)(iii) by providing that if an actual
shareholder of the issuing corporation is deemed to receive a nominal
share of stock of the issuing corporation described in Sec. 1.368-
2(l), such shareholder must, after allocating and adjusting the basis
of the nominal share in accordance with the rules of this section and
Sec. 1.358-1, and after adjusting the basis in the nominal share for
any transfers described in Sec. 1.358-1, designate the share of stock
of the issuing corporation to which the basis, if any, of the nominal
share will attach.
The IRS and the Treasury Department also are clarifying the
effective date for a 2009 amendment to the regulations under Sec.
1.358-2(a)(iii).
Special Analyses
It has been determined that this Treasury decision is not a
significant regulatory action as defined in Executive Order 12866, as
supplemented by Executive Order 13563. 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. For the applicability of the Regulatory
Flexibility Act, please refer to the cross-reference notice of proposed
rulemaking published elsewhere in this Federal Register. Pursuant to
section 7805(f) of the Internal Revenue Code, these regulations were
submitted to the Chief Counsel for Advocacy of the Small Business
Administration for comment on their impact on small business.
Drafting Information
The principal author of these regulations is Lisa A. Fuller of the
Office of the Associate Chief Counsel (Corporate). However, other
personnel from the IRS and the Treasury Department participated in
their development.
List of Subjects in 26 CFR Part 1
Income taxes, Reporting and recordkeeping requirements.
Amendments to the Regulations
Accordingly, 26 CFR part 1 is amended as follows:
PART 1--INCOME TAXES
0
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 1.358-2 also issued under 26 U.S.C. 358(b)(1).
0
Par. 2. Section 1.358-2 is amended by:
0
1. Revising paragraph (a)(2)(iii).
0
2. Revising paragraph (d).
The revisions read as follows:
Sec. 1.358-2 Allocation of basis among nonrecognition property.
(a) * * *
(2) * * *
(iii) [Reserved]. For further guidance, see Sec. 1.358-
2T(a)(2)(iii).
* * * * *
(d) Effective/applicability date. This section generally applies to
exchanges and distributions of stock and securities occurring on or
after January 23, 2006. However, paragraph (a)(2)(iii) of this section
applies to exchanges and distributions of stock and securities
occurring on or after November 21, 2011. See Sec. 1.358-2(a)(2)(iii),
as contained in 26 CFR part 1 revised as of April 1, 2010, for
exchanges and distributions of stock and securities occurring on or
after January 23, 2006, and before November 21, 2011.
0
Par. 3. Section 1.358-2T is added to read as follows:
Sec. 1.358-2T Allocation of basis among nonrecognition property
(temporary).
(a)(1) through (a)(2)(ii) [Reserved]. For further guidance, see
Sec. 1.358-2(a)(1) through (a)(2)(ii).
(iii) For purposes of this section, if a shareholder or security
holder surrenders a share of stock or a security in a transaction under
the terms of section 354 (or so much of section 356 as relates to
section 354) in which such shareholder or security holder receives no
property or property (including property permitted by section 354 to be
received without the recognition of gain or ``other property'' or
money) with a fair market value less than that of the stock or
securities surrendered in the transaction, such shareholder or security
holder shall be treated as follows.
(A) First, the shareholder or security holder shall be treated as
receiving the stock, securities, other property, and money actually
received by the shareholder or security holder in the transaction and
an amount of stock of the issuing corporation (as defined in Sec.
1.368-1(b)) that has a value equal to the excess of the value of the
stock or securities the shareholder or security holder surrendered in
the transaction over the value of the stock, securities, other
property, and money the shareholder or security holder actually
received in the transaction. If the shareholder owns only one class of
stock of the issuing corporation the receipt of which would be
consistent with the economic rights associated with each class of stock
of the issuing corporation, the stock deemed received by the
shareholder pursuant to the previous sentence shall be stock of such
class. If the shareholder owns multiple classes of stock of the issuing
corporation the receipt of which would be consistent with the economic
rights associated with each class of stock of the issuing corporation,
the stock deemed received by the shareholder shall be stock of each
such class owned by the shareholder immediately prior to the
transaction, in proportion to the value of the stock of each such class
owned by the shareholder immediately prior to the transaction. The
basis of each share of stock or security deemed received and actually
received shall be determined under the rules of this section.
(B) Second, the shareholder or security holder shall then be
treated as surrendering all of its shares of stock and securities in
the issuing corporation, including those shares of stock or securities
held immediately prior to the transaction, those shares of stock or
securities actually received in the transaction, and those shares of
stock deemed received pursuant to the previous sentence, in a
reorganization under section 368(a)(1)(E) in exchange for the shares of
stock and securities of the issuing corporation that the shareholder or
security holder actually holds immediately after the transaction. The
basis of each share of stock and security deemed received in the
reorganization under section 368(a)(1)(E) shall be determined under the
rules of this section.
(C) If an actual shareholder of the issuing corporation is deemed
to receive a nominal share of stock of the issuing corporation
described in Sec. 1.368-2(l), such shareholder must, after allocating
and adjusting the basis of the nominal share in accordance with the
rules of this section and Sec. 1.358-1, and after adjusting the basis
in the nominal share for any transfers described in Sec. 1.368-2(l),
designate the share of stock of the issuing corporation to which the
basis, if any, of the nominal share will attach.
(a)(2)(iv) through (c), Example 14 [Reserved]. For further
guidance, see Sec. 1.358-2(a)(2)(iv) through (c), Example 14.
Example 15. (i) Facts. Each of Corporation X and Corporation Y
has a single class of stock outstanding, all of which is owned by J,
an individual. J acquired 100 shares of Corporation X stock on Date
1 for $1.50 each. On Date 2, Corporation Y acquires the assets of
Corporation X for $100 of cash, their fair market value, in a
transaction described in Sec. 1.368-2(l). Pursuant to the terms of
the exchange, Corporation X does not receive any Corporation Y
stock. Corporation X
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distributes the $100 of cash to J in liquidation. Pursuant to Sec.
1.368-2(l), Corporation Y will be deemed to issue a nominal share of
Corporation Y stock to Corporation X in addition to the $100 of cash
actually exchanged for the Corporation X assets, and Corporation X
will be deemed to distribute all of the consideration to J. J will
have a basis of $50 in the nominal share of Corporation Y stock
under section 358(a).
(ii) Analysis. Under paragraph (a)(2)(iii) of this section, J is
the actual shareholder of Corporation Y, the issuing corporation,
deemed to receive the nominal share of Corporation Y stock described
in Sec. 1.368-2(l). Therefore, J must designate any share of
Corporation Y stock to which the basis of $50 in the nominal share
of Corporation Y stock will attach.
Example 16. (i) Facts. Each of Corporation X and Corporation Y
has a single class of stock outstanding, all of which is owned by
Corporation P. Corporation T has a single class of stock
outstanding, all of which is owned by Corporation X. The
corporations do not join in the filing of a consolidated return.
Corporation X acquired 100 shares of Corporation T stock on Date 1
for $1.50 each. On Date 2, Corporation Y acquires the assets of
Corporation T for $100 of cash, their fair market value, in a
transaction described in Sec. 1.368-2(l). Pursuant to the terms of
the exchange, Corporation T does not receive any Corporation Y
stock. Corporation T distributes the $100 of cash to Corporation X
in liquidation. Pursuant to Sec. 1.368-2(l), Corporation Y will be
deemed to issue a nominal share of Corporation Y stock to
Corporation T in addition to the $100 of cash actually exchanged for
the Corporation T assets, and Corporation T will be deemed to
distribute all of the consideration to Corporation X. Corporation X
will have a basis of $50 in the nominal share of Corporation Y stock
under section 358(a). Corporation X will be deemed to distribute the
nominal share of Corporation Y stock to Corporation P. Corporation X
does not recognize the loss on the deemed distribution of the
nominal share to Corporation P under section 311(a). Corporation P's
basis in the nominal share is zero, its fair market value, under
section 301(d).
(ii) Analysis. Corporation X is deemed to receive the nominal
share of Corporation Y stock described in Sec. 1.368-2(l). However,
under paragraph (a)(2)(iii) of this section, Corporation X is not an
actual shareholder of Corporation Y, the issuing corporation.
Therefore, Corporation X cannot designate any share of Corporation Y
stock to which the basis, if any, of the nominal share of
Corporation Y stock will attach. Furthermore, Corporation P cannot
designate a share of Corporation Y stock to which basis will attach
because Corporation P receives the nominal share with a basis of
zero.
(d) Effective/applicability date. This section applies to exchanges
and distributions of stock and securities occurring on or after
November 21, 2011.
(e) Expiration date. This section expires on or before November 18,
2014.
Approved: November 1, 2011.
Steven T. Miller,
Deputy Commissioner for Services and Enforcement.
Emily S. McMahon,
Acting Assistant Secretary of the Treasury (Tax Policy).
[FR Doc. 2011-29799 Filed 11-18-11; 8:45 am]
BILLING CODE 4830-01-P