[Federal Register Volume 79, Number 218 (Wednesday, November 12, 2014)]
[Rules and Regulations]
[Pages 67059-67063]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2014-26780]
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DEPARTMENT OF THE TREASURY
Internal Revenue Service
26 CFR Part 1
[TD 9702]
RIN 1545-BJ21
Allocation of Basis in All Cash D Reorganizations
AGENCY: Internal Revenue Service (IRS), Treasury.
ACTION: Final regulations and removal of temporary regulations.
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SUMMARY: This document contains final regulations regarding the
determination of the basis of stock or securities in certain
reorganizations where no stock or securities of the issuing corporation
is issued and distributed in the transaction. These final regulations
clarify that only a shareholder that owns actual shares in the issuing
corporation
[[Page 67060]]
in such a reorganization can designate the actual share of stock of the
issuing corporation to which the basis, if any, of the stock or
securities surrendered will attach. These regulations affect
corporations engaging in such transactions and their shareholders.
DATES: These regulations are effective on November 12, 2014.
FOR FURTHER INFORMATION CONTACT: Michael R. Gould, (202) 317-5363, or
Kevin M. Jacobs, (202) 317-5024 (not toll-free numbers).
SUPPLEMENTARY INFORMATION:
Background and Explanation of Provisions
1. Introduction
This Treasury Decision contains final regulations that amend the
Income Tax Regulations (26 CFR part 1) under section 358(a) of the
Internal Revenue Code (Code). In the case of certain reorganizations
under section 368, section 358(a) and the regulations thereunder
provide, in part, rules for determining a taxpayer's basis in stock or
securities of an issuing corporation received without the recognition
of gain or loss (permitted property), as well as rules relating to the
basis of other property received in the reorganization. These final
regulations clarify the rules under section 358(a) regarding the
allocation of stock basis in a transaction that qualifies as a
reorganization under section 368(a)(1)(D) (D reorganization) in which
no permitted property is actually issued (All Cash D reorganization).
2. D Reorganizations Generally
Section 368(a)(1)(D) provides, in part, that a reorganization
includes a transfer by a corporation (transferor corporation) of all or
a part of its assets to another corporation (issuing corporation) if,
immediately after the transfer, the transferor corporation or one or
more of its shareholders (including persons who were shareholders
immediately before the transfer), or any combination thereof, is in
control of the issuing corporation, but only if, in pursuance of the
plan, stock or securities of the issuing corporation are distributed
under section 354, 355, or 356.
Under section 354(a)(1), a shareholder or security holder of the
transferor corporation generally recognizes no gain or loss if the
shareholder or security holder exchanges stock or securities of the
transferor corporation, in pursuance of the plan of reorganization,
solely for permitted property. Section 354(b)(1) provides that section
354(a)(1) is inapplicable to a D reorganization unless the issuing
corporation acquires substantially all of the assets of the transferor
corporation, and the stock, securities, and other properties received
by the transferor corporation, as well as the other properties of the
transferor corporation, are distributed in pursuance of the plan of
reorganization. Further, section 356 provides, in part, that if section
354 would apply to an exchange but for the fact that property other
than permitted property is also received, the recipient recognizes
gain, but not in excess of the amount of money and fair market value of
such other property.
3. All Cash D Reorganizations
On December 18, 2009, the IRS and the Treasury Department published
final regulations (TD 9475) in the Federal Register (74 FR 67053) (2009
regulations) providing that the distribution requirement of section
368(a)(1)(D) and 354(b)(1)(B) is satisfied in the case of an All Cash D
reorganization even though there is no actual distribution of permitted
property by the transferor corporation, provided the same person(s)
own, directly or indirectly, all of the stock of the transferor and
issuing corporations in identical proportions. See Sec. 1.368-
2(l)(2)(i). In such cases, assuming a value-for-value exchange between
the transferor and issuing corporations, the issuing corporation is
deemed to issue a nominal share of its stock in addition to the actual
consideration exchanged for the transferor corporation's assets. If the
issuing corporation provides the transferor corporation with no
consideration or consideration having a value less than the transferor
corporation's assets (bargain exchange), the issuing corporation is
treated as issuing shares of its stock having a value necessary to
result in a value-for-value exchange. The rules of Sec. 1.368-2(l)
further provide that all stock treated as issued, or deemed issued, by
the issuing corporation to the transferor corporation is then deemed
distributed by the transferor corporation to its shareholders and, if
appropriate, further transferred through chains of ownership to the
extent necessary to reflect the actual ownership of the transferor and
issuing corporations.
The 2009 regulations also amended the regulations under Sec.
1.358-2(a)(2)(iii). Prior to being amended by the 2009 regulations,
these regulations provided a two-step rule under section 358 for
allocating the basis of stock or securities of a transferor corporation
surrendered as a result of a bargain exchange by a shareholder or
security holder (bargain exchange basis rule). First, a shareholder or
security holder was generally treated as receiving the consideration
actually received in the transaction and an amount of stock of the
issuing corporation having a value equal to the difference in value
between the stock or securities surrendered in the transaction and the
consideration actually received. Second, the shareholder or security
holder was treated as surrendering all of its stock and securities that
it actually owned and was treated as owning of the issuing corporation
in a reorganization under section 368(a)(1)(E) in exchange for the
shares of stock and securities of the issuing corporation actually held
immediately after the transaction.
The 2009 regulations added a new sentence after the bargain
exchange basis rule that permitted a shareholder that was deemed to
have received a nominal share of issuing corporation stock under Sec.
1.368-2(l) to, after adjusting the basis of the nominal share under the
rules of Sec. Sec. 1.358-1 and 1.358-2, designate a share of the
issuing corporation's stock to which the basis, if any, of the nominal
share would attach (nominal share basis designation rule).
4. Temporary Regulations
On November 21, 2011, the IRS and the Treasury Department published
temporary regulations (TD 9558) in the Federal Register (76 FR 71878)
to amend Sec. 1.358-2(a)(2)(iii) of the 2009 regulations in response
to an inappropriate interpretation of those rules. Certain taxpayers
had taken the position that a shareholder of a transferor corporation
who did not own any actual shares of an issuing corporation's stock
immediately after the section 354 or section 356 exchange in a value-
for-value All Cash D reorganization was permitted to designate another
person's share of the issuing corporation's stock as the share to which
the nominal share's basis could attach. For example, assume that
corporation P owns all of the stock of corporations S1 and S2, and that
S1 owns all of the stock of corporation S3. If S3 (the transferor
corporation) transfers to S2 all of its assets (subject to liabilities)
having a value of $100x in exchange for $100x of cash, S2 (the issuing
corporation) would be deemed to issue a nominal share of its stock to
S3 under Sec. 1.368-2(l)(2), provided the transaction otherwise
qualified as a D reorganization. S3 would then be deemed to distribute
the nominal S2 share to S1 in the section 356 exchange. Because S1
received a nominal S2 share but did not actually own any S2 stock,
Sec. 1.368-2(l)(2) would require that the nominal S2 share be treated
as
[[Page 67061]]
distributed by S1 to P to reflect the actual ownership of S2 and P's
basis in the nominal share would be its fair market value under section
301(d). In an attempt to avoid this result under similar circumstances,
certain taxpayers took the position that S1 was permitted to, after
allocating the basis of its S3 stock to the nominal S2 share under the
rules of Sec. Sec. 1.358-1 and 1.358-2, designate a share of S2 stock
that was actually held by P to which S1's basis in the nominal S2 share
would attach. These taxpayers further took the position that such
designation and allocation could occur immediately before the nominal
S2 share was deemed (under Sec. 1.368-2(l)) to be further transferred
through the chain of ownership to reflect the actual ownership of S3
and S2.
Under this interpretation, any built-in loss in the shares of
transferor corporation stock (which the 2009 regulations allocated to
the nominal share of issuing corporation stock) would be preserved even
if a direct shareholder of the transferor corporation did not directly
own stock of the issuing corporation. Taxpayers could thus avoid losing
the built-in loss in the nominal share, which may have occurred as a
result of the deemed transfer(s) of the nominal share through the
chains of ownership to the actual shareholder(s) of the issuing
corporation. In addition, the actual shareholder could then sell the
share of the issuing corporation's stock to which the nominal share's
basis was allocated and recognize a loss or a reduced amount of gain.
The IRS and the Treasury Department did not intend for the nominal
share basis designation rule of the 2009 regulations to allow such an
inappropriate allocation of basis and do not believe the 2009
regulations have ever supported such an allocation. The temporary
regulations therefore clarified the application of the nominal share
basis designation rule of the 2009 regulations. Specifically, the
temporary regulations provided that, using the facts of the example
described earlier in this section, because P (an actual shareholder of
S2 (the issuing corporation)) is deemed to receive a nominal share of
S2 stock described in Sec. 1.368-2(l), P must, after allocating and
adjusting the basis of the nominal S2 share in accordance with the
rules of Sec. Sec. 1.358-1 and 1.358-2, and after adjusting the basis
in the nominal S2 share for any transfers described in Sec. 1.368-2(l)
(that is the transfer from S3 to S1 and from S1 to P), designate the
share of S2 stock actually held by P to which the basis, if any, of the
nominal S2 share will attach. The purpose of the temporary regulations
was to clarify that only a shareholder that owned actual shares of the
issuing corporation's stock immediately after a value-for-value All
Cash D reorganization could designate one of its actual shares of the
issuing corporation's stock to which the nominal share's basis, if any,
would attach.
A notice of proposed rulemaking (REG-101273-10) cross-referencing
the temporary regulations was also published in the Federal Register
(76 FR 71919) on November 21, 2011. No written comments were received
in response to the notice of proposed rulemaking. In addition, no
requests for a public hearing were received, and accordingly, no
hearing was held.
5. Final Regulations
This Treasury Decision adopts the temporary regulations with
clarifying changes. These changes include redesignating the paragraphs
under Sec. 1.358-2(a)(2)(iii) to separate newly designated Sec.
1.358-2(a)(2)(iii)(A), the bargain exchange basis rule, and newly
designated Sec. 1.358-2(a)(2)(iii)(B), the nominal share basis
designation rule, and clarifying the language of these rules. The IRS
and the Treasury Department do not intend any substantive changes to
the rules of the temporary regulations.
The changes to newly designated Sec. 1.358-2(a)(2)(iii)(A)(1) and
(2) were made to clarify that the deemed recapitalization under the
second step of the bargain exchange basis rule occurs only after the
stock treated as issued by the issuing corporation pursuant to Sec.
1.368-2(l) is held by a shareholder that actually owns issuing
corporation stock. Thus, using the facts of the example described in
section 4 of this preamble, except that the consideration provided by
S2 is not $100 of cash but only $90 of cash, because S1 (the
shareholder of S3 (the transferor corporation)) does not actually own
any stock of S2 (the issuing corporation), the basis of the S2 stock
treated as issued under the first step of the bargain exchange basis
rule that S1 receives in the section 356 exchange is determined under
Sec. Sec. 1.358-1 and 1.358-2 (without regard to the second step of
the bargain exchange basis rule or the nominal share basis designation
rule) and then further adjusted for the transfer to P described in
Sec. 1.368-2(l) prior to the deemed recapitalization of the stock of
S2 that P actually holds and is deemed to hold.
The numbering changes reflected in newly designated Sec. 1.358-
2(a)(2)(iii)(A)(1), (2) and (B) were made to clarify that the nominal
share basis designation rule applies in cases in which a nominal share
of issuing corporation stock is deemed issued under Sec. 1.368-2(l).
Additional changes were made under Sec. 1.358-2(a)(2)(iii) to
emphasize that the nominal share basis designation rule applies only
after an actual shareholder of the issuing corporation receives the
nominal share pursuant to Sec. 1.368-2(l), and that such a shareholder
must attach the nominal share's basis to a share of the issuing
corporation's stock that the particular shareholder actually owns.
In addition, the analysis of Example 16 of Sec. 1.358-2(c) has
been clarified to confirm that Corporation P must designate a share of
Corporation Y stock to which the distributed nominal share's zero basis
will attach. This designation of the share to which the basis of a
nominal share must attach is relevant in various scenarios, including
if an affiliated group files a consolidated return and must determine
the particular share that is a successor asset for purposes of Sec.
1.1502-13. Finally, minor editorial changes were made to reflect the
new paragraph designations under Sec. 1.358-2(a)(2)(iii) and to make
Examples 15 and 16 of Sec. 1.358-2(c) consistent with the clarifying
changes adopted by the final regulations.
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 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 these 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, the notice of proposed rulemaking
preceding these regulations was submitted to the Chief Counsel for
Advocacy of the Small Business Administration for comment on its impact
on small businesses, and no comments were received.
Drafting Information
The principal author of these regulations is Michael R. Gould of
the Office of Associate Chief Counsel (Corporate). However, other
personnel from the IRS and the Treasury Department participated in
their development.
[[Page 67062]]
Adoption of 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 continues to read in
part as follows:
Authority: 26 U.S.C. 7805 * * *
Section 1.358-2 is also issued under 26 U.S.C. 358(b).
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Par. 2. Section 1.358-2 is amended by:
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1. Revising paragraph (a)(2)(iii).
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2. Adding Example 15 and Example 16 to paragraph (c).
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3. Revising paragraph (d).
The revisions and additions are as follows:
Sec. 1.358-2 Allocation of basis among nonrecognition property.
(a) * * *
(2) * * *
(iii)(A) 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 the 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:
(1) Such 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 at that time. The basis of each share of stock
or security of the issuing corporation deemed received and actually
received shall be determined under the rules of this section. If and to
the extent necessary to reflect the actual ownership of the issuing
corporation immediately after the exchange to which section 354 (or so
much of section 356 as relates to section 354) applies, an appropriate
amount of the stock of the issuing corporation treated as issued to the
shareholder or security holder in the exchange is deemed further
transferred in accordance with Sec. 1.368-2(l) to reflect the actual
ownership of the issuing corporation. Paragraph (a)(2)(iii)(A)(2) of
this section is only applied to any shareholder of the issuing
corporation after all of the deemed transfers pursuant to Sec. 1.368-
2(l) are completed. The transferred shares' basis shall be adjusted for
all deemed transfers required by Sec. 1.368-2(l).
(2) A direct shareholder of the issuing corporation that receives
the shares deemed issued as part of the transaction, as described in
paragraph (a)(2)(iii)(A)(1) of this section, 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 as described in paragraph (a)(2)(iii)(A)(1) of
this section, 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.
(B) For purposes of this section, if an actual shareholder of the
issuing corporation is deemed to receive a nominal share of stock of
the issuing corporation as provided in Sec. 1.368-2(l), then that
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, designate the share of stock of the issuing corporation that
it owns to which the basis, if any, of the nominal share will attach.
If the shareholder does not actually own any shares of stock in the
issuing corporation immediately after the exchange to which section 354
(or so much of section 356 as relates to section 354) applies, the
nominal share of stock of the issuing corporation received by the
shareholder in the exchange is deemed further transferred in accordance
with Sec. 1.368-2(l) without applying the designation rule set forth
in the first sentence of this paragraph until it is transferred to a
person that actually owns stock in the issuing corporation. The
transferred share's basis shall be adjusted for all deemed transfers
required by Sec. 1.368-2(l).
* * * * *
(c) * * *
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 purchased 100 shares of Corporation X stock on Date
1 for $1.50 each, resulting in J having an aggregate basis in the
stock of Corporation X of $150. 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 distributes the $100 of cash to J
and retains no assets.
(ii) Analysis. 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. Corporation X will then be deemed to
distribute the nominal share of Corporation Y stock to J in addition
to the $100 of cash actually distributed to J. Pursuant to Sec.
1.368-2(l), J, the actual shareholder of Corporation Y, the issuing
corporation, is deemed to receive the nominal share of Corporation Y
stock described in Sec. 1.368-2(l). J will have a basis of $50 in
the nominal share of Corporation Y stock under section 358(a)(1).
Therefore, under paragraph (a)(2)(iii)(B) of this section, J must
designate a share of Corporation Y stock to which J's 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 purchased 100 shares of Corporation T stock on Date 1
for $1.50 each, resulting in Corporation X having an aggregate basis
in the stock of Corporation T of $150. 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 and retains no assets.
[[Page 67063]]
(ii) Analysis. 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. Corporation T will be deemed to distribute
the nominal share of Corporation Y stock to Corporation X in
addition to the $100 of cash actually distributed. Corporation X
will have a basis of $50 in the nominal share of Corporation Y stock
under section 358(a). However, Corporation X is not an actual
shareholder of Corporation Y, the issuing corporation. Therefore,
Corporation X cannot designate any share of Corporation Y stock
under paragraph (a)(2)(iii)(B) of this section to which the basis of
the nominal share of Corporation Y stock will attach and Corporation
X will be deemed to distribute the nominal share of Corporation Y
stock to Corporation P as required by Sec. 1.368-2(l). 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 it receives is zero, its fair market
value, under section 301(d). Under paragraph (a)(2)(iii)(B) of this
section, Corporation P must designate a share of Corporation Y stock
to which the nominal share's zero basis will attach.
(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) and Examples 15
and 16 of paragraph (c) of this section apply to exchanges and
distributions of stock and securities occurring on or after November
12, 2014. See Sec. 1.358-2T(a)(2)(iii) and Sec. 1.358-2T(c), Examples
15 and 16, as contained in 26 CFR part 1, revised April 1, 2014, for
exchanges and distributions of stock and securities occurring on or
after November 21, 2011 and before November 12, 2014; see Sec. 1.358-
2(a)(2)(iii), as contained in 26 CFR part 1, revised as of April 1,
2011, for exchanges and distributions of stock and securities occurring
on or after January 23, 2006 and before November 21, 2011.
Sec. 1.358-2T [Removed]
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Par. 3. Section 1.358-2T is removed.
John Dalrymple,
Deputy Commissioner for Services and Enforcement.
Approved: October 17, 2014.
Mark J. Mazur,
Assistant Secretary of the Treasury (Tax Policy).
[FR Doc. 2014-26780 Filed 11-10-14; 8:45 am]
BILLING CODE 4830-01-P