[Federal Register Volume 63, Number 184 (Wednesday, September 23, 1998)]
[Proposed Rules]
[Pages 50816-50819]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 98-25342]
[[Page 50816]]
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DEPARTMENT OF THE TREASURY
Internal Revenue Service
26 CFR Part 1
[REG-106221-98]
RIN 1545-AW53
Guidance Under Section 1032 Relating to the Treatment of a
Disposition by One Corporation of the Stock of Another Corporation in a
Taxable Transaction
AGENCY: Internal Revenue Service (IRS), Treasury.
ACTION: Notice of proposed rulemaking and notice of public hearing.
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SUMMARY: This document contains proposed regulations relating to the
treatment of a disposition by a corporation (the acquiring corporation)
of the stock of another corporation (the issuing corporation) in a
taxable transaction. The proposed regulations interpret section 1032 of
the Internal Revenue Code. The proposed regulations affect corporations
and their subsidiaries.
DATES: Written comments must be received by December 22, 1998. Requests
to speak and outlines of topics to be discussed at the public hearing
scheduled for Thursday, January 7, 1999 must be received by Thursday,
December 17, 1998.
ADDRESSES: Send submissions to: CC:DOM:CORP:R (REG-106221-98), room
5228, 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-106221-98), 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, Lee A.
Dean, (202) 622-7550; concerning submissions and the hearing, LaNita
VanDyke, (202) 622-7180 (not toll-free numbers).
SUPPLEMENTARY INFORMATION:
Background
Section 1032(a) provides that no gain or loss shall be recognized
to a corporation on the receipt of money or other property in exchange
for stock (including treasury stock) of such corporation. No gain or
loss shall be recognized by a corporation with respect to any lapse or
acquisition of an option to buy or sell its stock (including treasury
stock).
Before the enactment of section 1032 in 1954, Treasury regulations
provided that ``where a corporation deals in its own shares as it might
in the shares of another corporation, the resulting gain or loss is to
be computed in the same manner as though the corporation were dealing
in the shares of another.'' (Treas. Reg. 111, Sec. 29.22(a)-15 (1934)).
As applied, this regulation resulted in the recognition of gain or
loss on the disposition by a corporation of its treasury stock, even
though the corporation would not have recognized gain or loss on the
disposition of newly issued shares. See, e.g., Firestone Tire & Rubber
Co. v. Commissioner, 2 T.C. 827 (1943). This disparity of treatment
gave rise to tax avoidance possibilities. A corporation expecting a
gain upon disposition of treasury shares might avoid such gain by
canceling its treasury shares and issuing new stock, whereas a
corporation might produce a fictitious loss by purchasing its own
shares and reselling them at a lower price.
Congress enacted section 1032(a) in 1954 to eliminate this
potential disparity between the tax treatment of a disposition by a
corporation of its treasury stock and a disposition of newly issued
stock. H.R. No. 1337, 83d Cong., 2d Sess. 268 (1954).
Rev. Rul. 74-503 (1974-2 C.B. 117) considers the tax consequences
of a parent corporation's transfer to its subsidiary of its own
treasury stock in a transaction to which section 351 applies. The
ruling states that ``[t]he transfer of [parent] stock was not for the
purpose of enabling [the subsidiary corporation] to acquire property by
the use of such stock.'' Rev. Rul. 74-503 holds that, since the basis
of previously unissued parent stock in the hands of the parent
corporation is zero, the basis of the parent corporation's treasury
stock in the hands of the parent corporation is also zero. Accordingly,
under the transferred basis rule of section 362(a), the subsidiary
corporation's basis of the treasury stock of the parent corporation is
also zero (the zero basis result).
Section 1.1032-2(b), applicable to certain triangular
reorganizations occurring on or after December 23, 1994, eliminates
gain recognition in certain cases when an acquiring corporation (S)
acquires property or stock of another corporation (T) in exchange for
stock of the corporation (P) in control of S. Section 1.1032-2(b)
provides that, ``For purposes of Sec. 1.1032-1(a), in the case of a
forward triangular merger, a triangular C reorganization, or a
triangular B reorganization (as described in Sec. 1.358-6(b)), P stock
provided by P to S, or directly to T or T's shareholders on behalf of
S, pursuant to the plan of reorganization is treated as a disposition
by P of its own stock for T's assets or stock, as applicable.'' Section
1.1032-2(c) provides that S must recognize gain or loss on its exchange
of P stock if S did not receive the P stock pursuant to the plan of
reorganization.
Section 1.1502-13(f)(6)(ii), initially published as temporary
regulations applicable to transactions occurring on or after July 12,
1995 (TD 8598, 1995-2 C.B. 188), eliminates gain recognition under
certain conditions on a member's disposition of the stock of its common
parent. If the requirements of that section are satisfied, Sec. 1.1502-
13(f)(6)(ii) provides that ``If a member, M, would otherwise recognize
gain on a qualified disposition of P stock, then immediately before the
qualified disposition, M is treated as purchasing the P stock from P
for fair market value with cash contributed to M by P (or, if
necessary, through any intermediate members).'' Among other
requirements, the member must, pursuant to a plan, transfer the stock
``immediately to a nonmember that is not related.'' See Sec. 1.1502-
13(f)(6)(ii)(B). The preamble to the temporary regulations explains
that the gain relief provisions ``prevent taxpayers from being subject
to inappropriate taxation on gains in certain transactions.'' (TD 8598,
1995-2 C.B. 188, 189.)
Section 83 provides rules for property, including parent's stock,
transferred in connection with the performance of services. Section
83(h) provides, in part, that ``there shall be allowed as a deduction
under section 162, to the person for whom were performed the services
in connection with which such property was transferred, an amount equal
to the amount included * * * in the gross income of the person who
performed such services.'' Section 1.83-6(b) provides that ``[e]xcept
as provided in section 1032, at the time of the transfer of property in
connection with the performance of services the transferor recognizes
gain to the extent that the transferor receives an amount that exceeds
the transferor's basis in the property.'' Section 1.83-6(d) provides
[[Page 50817]]
that, ``[i]f a shareholder of a corporation transfers property to an
employee of such corporation * * * in consideration of services
performed for the corporation, the transaction shall be considered to
be a contribution of such property to the capital of such corporation
by the shareholder, and immediately thereafter a transfer of such
property by the corporation to the employee. * * * .''
Rev. Rul. 80-76 (1980-1 C.B. 15) addresses the use of a parent
corporation's stock as compensation to an employee of a subsidiary
corporation. Under the facts, A, a shareholder of P, transfers P stock
directly to B, an employee of S. The ruling holds in part that,
``because section 83 applies to the transfer of P stock to B, S does
not recognize gain or loss on the transfer of the P stock.''
Explanation of Provisions
Some of the concerns that ultimately led to the enactment of
section 1032 are present where a subsidiary corporation holds the stock
of a parent corporation. For example, a parent corporation could place
treasury stock in a subsidiary corporation in order to attempt to
recognize losses if the price of the parent corporation stock goes
down, or could sell shares directly if the price rises. See Rev. Rul.
74-503 (1974-2 C.B. 117). The zero basis result limits such planning
opportunities.
These tax avoidance possibilities are not present, however, in
transactions where one corporation transfers its own stock to another
corporation pursuant to a plan by which the second corporation
immediately transfers the stock of the first corporation to acquire
money or other property. The risk of selective loss recognition does
not arise where the stock of the parent corporation is used immediately
by the subsidiary corporation to acquire money or other property and
therefore does not have sufficient time to depreciate in value. This
concept is reflected in Rev. Rul. 74-503, which provides a factual
carve-out for transfers of parent corporation stock made for the
purpose of enabling a subsidiary corporation to acquire property. Also,
the IRS and the Treasury have not applied the zero basis result in such
integrated transactions, regardless of whether such a disposition of
stock is part of a tax-free reorganization or is part of a taxable
acquisition. See Secs. 1.1502-13(f)(6)(ii) and 1.1032-2(b). These
proposed regulations provide that no gain or loss is recognized in
certain taxable transactions where one corporation immediately disposes
of the stock of another corporation pursuant to a plan to acquire money
or other property. The IRS and Treasury believe that, in such
transactions, the nonapplicability of the zero basis result avoids
inappropriate gain recognition and is consistent with the purposes of
section 1032. No inference is intended regarding the applicability of
the zero basis result to transactions outside of the scope of these
proposed regulations.
If the conditions of these proposed regulations are satisfied, no
gain or loss is recognized on the disposition of the stock of one
corporation (the issuing corporation) by another corporation (the
acquiring corporation). The proposed regulations apply if, pursuant to
a plan to acquire money or other property, (1) the acquiring
corporation acquires stock of the issuing corporation directly or
indirectly from the issuing corporation in a transaction in which, but
for this section, the basis of the stock of the issuing corporation in
the hands of the acquiring corporation would be determined with respect
to the issuing corporation's basis in the issuing corporation's stock
under section 362(a); (2) the acquiring corporation immediately
transfers the stock of the issuing corporation to acquire money or
other property; and (3) no party receiving stock of the issuing
corporation from the acquiring corporation receives a substituted basis
in the stock of the issuing corporation within the meaning of section
7701(a)(42). For purposes of this section, ``property'' includes
services. See Sec. 1.1032-1.
Mechanics of Proposed Regulations
These proposed regulations adopt the cash purchase model used in
Sec. 1.1502-13(f)(6)(ii) to provide relief from gain.
In transactions to which the proposed regulations apply,
immediately before the disposition of the issuing corporation's stock,
the acquiring corporation is treated as purchasing the issuing
corporation's stock from the issuing corporation for fair market value
with cash contributed to the acquiring corporation by the issuing
corporation (or, if necessary, through intermediate corporations).
As a result of this deemed cash purchase of stock, the acquiring
corporation will have a fair market value basis in the issuing
corporation's stock pursuant to section 1012, and the issuing
corporation will increase its basis in the stock of the acquiring
corporation (and, if necessary, the stock basis of intermediate
corporations) by that amount. See, e.g., section 358.
No inference is intended regarding whether circular cash flows
would be respected apart from this regulation. Similarly, no inference
is intended with respect to other methods of avoiding gain on the
acquiring corporation's use of the issuing corporation's stock.
A cross-reference in Sec. 1.83-6(d) to the proposed regulations
clarifies that the mechanics of the proposed regulations--rather than
the mechanics of Sec. 1.83-6(d)--apply to a corporate shareholder's
transfer of its own stock to any person in consideration of services
performed for another corporation where the conditions of these
proposed regulations are satisfied.
The cash purchase model of these proposed regulations preserves the
acquiring corporation's deduction under section 162 for the use of the
issuing corporation's stock to compensate the acquiring corporation's
employees. In addition, as in Rev. Rul. 80-76, the cash purchase model
of these proposed regulations provides that the acquiring corporation
will not recognize gain or loss on the transfer of the stock of the
issuing corporation. The proposed regulations provide that the cash
purchase model is applicable only when the acquiring corporation
immediately transfers the stock of the issuing corporation to acquire
money or other property. The IRS and the Treasury believe that these
proposed regulations address the same issues as in Rev. Rul. 80-76 and,
when issued in final form, will render Rev. Rul. 80-76 obsolete.
Stock Options
Section 1032(a), in conjunction with the rules governing the
taxation of options, also operates to prevent selective loss
recognition in the case where a corporation issues options to buy or
sell its own stock. See Deficit Reduction Act of 1984, H.R. Rep. No.
432, 98th Cong., 2d. Sess. pt. 2 1196 (1984) (expanding section 1032(a)
to provide that a corporation does not recognize gain or loss with
respect to any lapse or acquisition of an option to buy or sell its
stock, including treasury stock). As in the case of a subsidiary
corporation's dealings in parent corporation stock, however, section
1032 may not always prevent selective loss recognition where a
subsidiary corporation deals in options on parent corporation stock.
Again, the zero basis result serves to limit such planning
opportunities.
The Treasury and the IRS have determined that the concerns
underlying section 1032 are not present where the issuing corporation
transfers options on its own stock to the acquiring corporation
pursuant to a plan by which the acquiring corporation immediately
transfers those options to acquire money or other property.
Accordingly, these proposed regulations
[[Page 50818]]
apply to an option issued by an issuing corporation to buy or sell its
own stock in the same manner as they apply to stock of an issuing
corporation.
Amendment to Sec. 1.1032-2
The preamble to the final regulations under Sec. 1.1032-2 states
that the tax treatment of a disposition by the acquiring corporation
(S) of stock options of the corporation (P) in control of S was beyond
the scope of the project. (Preamble to Final Regulations under sections
358, 1032 and 1502 [TD 8648, 1996-1 C.B. 37, 39].) The IRS and the
Treasury believe that the tax treatment of stock options of the issuing
corporation in these triangular reorganizations also should be
addressed under section 1032. Accordingly, these proposed regulations
amend Sec. 1.1032-2 to provide that Sec. 1.1032-2 shall apply to an
option to buy or sell P stock issued by P in the same manner as that
section applies to the stock of P.
Proposed Effective Date
The regulations are proposed to be effective on the date that final
regulations are published in the Federal Register.
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 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 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 written comments (preferably a
signed original and eight copies) that are timely submitted to the IRS.
All comments will be available for public inspection and copying.
A public hearing has been scheduled for Thursday, January 7, 1999
beginning at 10 a.m., in room 2615, Internal Revenue Building, 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 who wish to present oral comments at the hearing must
request to speak, and submit an outline of topics to be discussed and
the time to be devoted to each topic by Thursday, December 17, 1998.
A period of ten minutes will be allocated 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 Lee A. Dean
of the Office of the Assistant Chief Counsel (Corporate), IRS. However,
other personnel from the IRS and Treasury Department 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 continues to read in
part as follows:
Authority: 26 U.S.C. 7805 * * *
Par. 2. Section 1.83-6 is amended by adding two sentences to the
end of paragraph (d)(1) to read as follows:
Sec. 1.83-6 Deduction by employer.
* * * * *
(d)(1) * * * For special rules that may apply to a corporate
shareholder's transfer of its own stock to any person in consideration
of services performed for another corporation, see Sec. 1.1032-3. The
preceding sentence applies to transfers of stock occurring on or after
the date these regulations are published as final regulations in the
Federal Register.
* * * * *
Par. 3. Section 1.1032-2 is amended by:
1. Revising paragraph (e);
2. Adding paragraph (f).
The addition and revision read as follows:
Sec. 1.1032-2 Disposition by a corporation of stock of a controlling
corporation in certain triangular reorganizations.
* * * * *
(e) Stock options. The rules of this section shall apply to an
option to buy or sell P stock issued by P in the same manner as the
rules of this section apply to P stock.
(f) Effective dates. This section applies to triangular
reorganizations occurring on or after December 23, 1994. Paragraph (e)
applies to transfers of stock options occurring on or after the date
these regulations are published as final regulations in the Federal
Register.
Par. 4. Section 1.1032-3 is added to read as follows:
Sec. 1.1032-3 Disposition of stock or stock options in certain
transactions not qualifying under any other nonrecognition provision.
(a) Scope. This section provides rules for certain transactions in
which one corporation (the acquiring corporation) acquires money or
other property (as defined in Sec. 1.1032-1) in exchange, in whole or
in part, for stock of another corporation (the issuing corporation).
(b) General rule. In a transaction to which this section applies,
no gain or loss is recognized on the disposition of the issuing
corporation's stock by the acquiring corporation. The transaction is
treated as if, immediately before the acquiring corporation disposes of
the stock of the issuing corporation, the acquiring corporation
purchased the issuing corporation's stock from the issuing corporation
for fair market value with cash contributed to the acquiring
corporation by the issuing corporation (or, if necessary, through
intermediate corporations).
(c) Applicability. The rules of this section apply only if,
pursuant to a plan to acquire money or other property--
(1) The acquiring corporation acquires stock of the issuing
corporation directly or indirectly from the issuing corporation in a
transaction in which, but for this section, the basis of the stock of
the issuing corporation in the hands of the acquiring corporation would
be determined with respect to the issuing corporation's basis in the
issuing corporation's stock under section 362(a);
(2) The acquiring corporation immediately transfers the stock of
the issuing corporation to acquire money or other property; and
(3) No party receiving stock of the issuing corporation from the
acquiring corporation receives a substituted basis in the stock of the
issuing corporation within the meaning of section 7701(a)(42).
(d) Stock options. The rules of this section shall apply to an
option issued by a corporation to buy or sell its own stock in the same
manner as the rules of this section apply to the stock of an issuing
corporation.
[[Page 50819]]
(e) Examples. The following examples illustrate the application of
this section:
Example 1. (i) X, a corporation, owns all of the stock of Y
corporation. Y reaches an agreement with A, an individual, to
acquire a truck from A in exchange for 10 shares of X stock with a
fair market value of $100. To effectuate Y's agreement with A, X
transfers to Y the X stock in a transaction in which, but for this
section, the basis of the X stock in the hands of Y would be
determined with respect to X's basis in the X stock under section
362(a). Y immediately transfers the X stock to A to acquire the
truck.
(ii) In this Example 1, no gain or loss is recognized on the
disposition of the X stock by Y. Immediately before Y's disposition
of the X stock, Y is treated as purchasing the X stock from X for
$100 of cash contributed to Y by X.
Example 2. (i) Assume the same facts as Example 1, except that,
rather than X stock, X transfers an option with a fair market value
of $100 to buy X stock.
(ii) In this Example 2, no gain or loss is recognized on the
disposition of the X stock option by Y. Immediately before Y's
disposition of the X stock option, Y is treated as purchasing the X
stock option from X for $100 of cash contributed to Y by X.
Example 3. (i) X, a corporation, owns all of the outstanding
stock of Y corporation. A, an individual, is an employee of Y.
Pursuant to an agreement between X and Y to compensate A for
services provided to Y, X transfers to A 10 shares of X stock with a
fair market value of $100. Under Sec. 1.83-6(d), but for this
section, the transfer of X stock by X to A would be treated as a
contribution of the X stock by X to the capital of Y, and
immediately thereafter, a transfer of the X stock by Y to A. But for
this section, the basis of the X stock in the hands of Y would be
determined with respect to X's basis in the X stock under section
362(a).
(ii) In this Example 3, no gain or loss is recognized on the
deemed disposition of the X stock by Y. Immediately before Y's
deemed disposition of the X stock, Y is treated as purchasing the X
stock from X for $100 of cash contributed to Y by X.
Example 4. (i) X, a corporation, issues 10 shares of X stock
subject to a substantial risk of forfeiture to compensate Y's
employee, A, for services. A does not have an election under section
83(b) in effect with respect to the X stock. X retains a
reversionary interest in the X stock in the event that A forfeits
the right to the stock. At the time the stock vests, the 10 shares
of X stock have a fair market value of $100. Under Sec. 1.83-6(d),
but for this section, the transfer of the X stock by X to A would be
treated, at the time the stock vests, as a contribution of the X
stock by X to the capital of Y, and immediately thereafter, a
disposition of the X stock by Y to A. The basis of the X stock in
the hands of Y, but for this section, would be determined with
respect to X's basis in the X stock under section 362(a).
(ii) In this Example 4, no gain or loss is recognized on the
deemed disposition of X stock by Y when the stock vests. mmediately
before Y's deemed disposition of the X stock, Y is treated as
purchasing X's stock from X for $100 of cash contributed to Y by X.
Example 5. (i) Assume the same facts as in Example 4, except
that Y (rather than X) retains a reversionary interest in the X
stock in the event that A forfeits the right to the stock. Several
years after X's transfer of the X shares, the stock vests.
(ii) This section does not apply to Y's deemed disposition of
the X shares. For the tax consequences to Y on the deemed
disposition of the X stock, see Sec. 1.83-6(b).
(f) Effective date. This section applies to transfers of stock or
stock options of the issuing corporation occurring on or after the date
these regulations are published as final regulations in the Federal
Register.
Michael P. Dolan,
Deputy Commissioner of Internal Revenue.
[FR Doc. 98-25342 Filed 9-22-98; 8:45 am]
BILLING CODE 4830-01-U