Corporate Reorganizations; Allocation of Basis in “All Cash D” Reorganizations, 71878-71880 [2011-29799]
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Federal Register / Vol. 76, No. 224 / Monday, November 21, 2011 / Rules and Regulations
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
Internal Revenue Service (IRS),
Treasury.
ACTION: Final and temporary
regulations.
AGENCY:
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 § 1.358–2T(d).
FOR FURTHER INFORMATION CONTACT: Lisa
A. Fuller at (202) 622–7550 (not a tollfree number).
SUPPLEMENTARY INFORMATION:
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SUMMARY:
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
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15:20 Nov 18, 2011
Jkt 226001
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 § 1.358–
2(a)(2)(iii) to provide that in the case of
a reorganization in which the property
received consists solely of nonqualifying 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 § 1.368–2(l), Y will be deemed to
issue a nominal share of Y stock to T in
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Sfmt 4700
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 § 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 § 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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Federal Register / Vol. 76, No. 224 / Monday, November 21, 2011 / Rules and Regulations
under § 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 § 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 § 1.358–1, and after
adjusting the basis in the nominal share
for any transfers described in § 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 § 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
Paragraph 1. The authority citation
for part 1 is amended by adding an entry
in numerical order to read in part as
follows:
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■
Authority: 26 U.S.C. 7805 * * *
Section 1.358–2 also issued under 26
U.S.C. 358(b)(1).
Par. 2. Section 1.358–2 is amended
by:
■
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■
■
1. Revising paragraph (a)(2)(iii).
2. Revising paragraph (d).
The revisions read as follows:
§ 1.358–2 Allocation of basis among
nonrecognition property.
(a) * * *
(2) * * *
(iii) [Reserved]. For further guidance,
see § 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 § 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.
■ Par. 3. Section 1.358–2T is added to
read as follows:
§ 1.358–2T Allocation of basis among
nonrecognition property (temporary).
(a)(1) through (a)(2)(ii) [Reserved]. For
further guidance, see § 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
§ 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
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71879
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 § 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 § 1.358–1, and after
adjusting the basis in the nominal share
for any transfers described in § 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
§ 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
§ 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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Federal Register / Vol. 76, No. 224 / Monday, November 21, 2011 / Rules and Regulations
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distributes the $100 of cash to J in
liquidation. Pursuant to § 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 § 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
§ 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 § 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 § 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.
VerDate Mar<15>2010
15:20 Nov 18, 2011
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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
ENVIRONMENTAL PROTECTION
AGENCY
40 CFR Part 26
[EPA–HQ–OPP–2010–0785; FRL–9325–5]
RIN 2070–AJ76
Protections for Subjects in Human
Research Involving Pesticides;
Notification of Submission to the
Secretary of Agriculture
Environmental Protection
Agency (EPA).
ACTION: Notification of submission to
the Secretary of Agriculture.
AGENCY:
This document notifies the
public that the Administrator of EPA
has forwarded to the Secretary of the
United States Department of Agriculture
(USDA) a draft final rule as required by
section 25(a) of the Federal Insecticide,
Fungicide, and Rodenticide Act
(FIFRA).
SUMMARY:
EPA has established a
docket for this action under docket
identification (ID) number EPA–HQ–
OPP–2010–0785. All documents in the
docket are listed in the docket index
available in https://www.regulations.gov.
Although listed in the index, some
information is not publicly available,
e.g., Confidential Business Information
(CBI) or other information whose
disclosure is restricted by statute.
Certain other material, such as
copyrighted material, is not placed on
the Internet and will be publicly
available only in hard copy form.
Publicly available docket materials are
available in the electronic docket at
https://www.regulations.gov, or, if only
available in hard copy, at the OPP
Regulatory Public Docket in Rm. S–
4400, One Potomac Yard (South Bldg.),
2777 S. Crystal Dr., Arlington, VA. The
Docket Facility is open from 8:30 a.m.
to 4 p.m., Monday through Friday,
excluding legal holidays. The Docket
Facility telephone number is (703) 305–
5805.
FOR FURTHER INFORMATION CONTACT:
Kelly Sherman, Immediate Office of the
Director (7501P), Office of Pesticide
Programs, Environmental Protection
ADDRESSES:
PO 00000
Frm 00016
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Agency, 1200 Pennsylvania Ave., NW.,
Washington, DC 20460–0001; telephone
number: (703) 305–8401; email address:
sherman.kelly@epa.gov.
SUPPLEMENTARY INFORMATION:
I. Does this action apply to me?
This action is directed to the public
in general. It simply announces the
submission of a draft final rule to the
Secretary of USDA and does not
otherwise affect any specific entities.
This action may, however, be of
particular interest to pesticide
registrants (NAICS code 325320) who
sponsor or conduct human research for
pesticides, and to other entities that
sponsor or conduct human research for
pesticides (NAICS code 541710). Since
other entities may also be interested, the
Agency has not attempted to describe all
the specific entities that may be
interested in this action. If you have any
questions regarding this action, consult
the person listed under FOR FURTHER
INFORMATION CONTACT.
II. What action is EPA taking?
As described in the Agency’s semiannual Regulatory Agenda, the draft
final rule would take final action with
regard to the proposed rule issued on
February 2, 2011 (76 FR 5735). The
amendments would make no changes to
the Common Rule or EPA’s codification
of the Common Rule. EPA proposed
these amendments as a result of a
settlement agreement.
Section 25(a)(2)(B) of FIFRA requires
the EPA Administrator to provide the
Secretary of USDA with a copy of any
draft final rule at least 30 days before
signing it in final form for publication
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Secretary of USDA comments in writing
regarding the draft final rule within 15
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time after the 15-day period.
III. Do any statutory and Executive
Order reviews apply to this
notification?
No. This document is not a rule. It is
merely a notification of submission to
the Secretary of USDA. As such, none
E:\FR\FM\21NOR1.SGM
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]]>Agencies
[Federal Register Volume 76, Number 224 (Monday, November 21, 2011)]
[Rules and Regulations]
[Pages 71878-71880]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2011-29799]
[[Page 71878]]
=======================================================================
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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.
-----------------------------------------------------------------------
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)
[[Page 71879]]
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
[[Page 71880]]
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
