Tax News

CCH (cch.taxgroup.com) reports:

The IRS has finalized, with some modifications, proposed regulations (NPRM REG-130863-04) concerning the continuing tax-free status of a reorganization when assets or stock of the acquired corporation are distributed to a corporation or partnership following the reorganization. The IRS and Treasury continue to be mindful of the continuity of interest and continuity of business enterprise (COBE) principles by focusing on the link between the former target corporation (T) shareholders and the T business assets following the reorganization. The regulations apply to transactions occurring on or after October 25, 2007, but do not apply to any transaction that occurs pursuant to a written agreement that is binding before October 25, 2007, and at all times after that date.
Qualified Group
The definition of a qualified group is expanded to permit qualified group members to aggregate their direct stock ownership of a corporation in determining whether they own the requisite Code Sec. 368(c) control (80%) in such corporation. The issuing corporation must own directly stock meeting such control requirement in at least one other corporation.
Continuity of Business Enterprise Requirement
The COBE regulations are expanded to provide that if members of the qualified group own interests in a partnership that meets requirements equivalent to the control definition in Code Sec. 368(c), any stock owned by such partnership is treated as owned by members of the qualified group. For example, the former target corporation remains a member of the qualified group after a reorganization under Code Sec. 368(a)(1)( (stock-for-stock acquisition or "B" reorganization) if the former target corporation stock is transferred to a partnership that is owned exclusively by members of the qualified group.
Distributions and Other Transfers
A reorganization transaction under Code Sec. 368(a) is not disqualified or recharacterized by subsequent transfers of assets or stock if the COBE requirement is satisfied and the transfers qualify as distributions or other transfers. The proposed regulations provided that distributions by the acquiring corporation would not affect the characterization of the reorganization as long as no distributee received substantially all of the acquired assets. The final regulations abandon the "substantially all" standard and provide that the reorganization will not be disqualified or recharacterized if the distributions do not result in a liquidation of the distributing corporation under Federal income tax law. Assets held by the acquiring corporation, or the merged corporation in the case of a reorganization under Code Sec. 368(a)(1)(A) (statutory merger or "A" reorganization) by reason of recapitalization prior to the transaction, are disregarded in determining if a liquidation occurred. In addition, certain indirect distributions are treated as direct distributions.
If only stock is distributed, two requirements must be met to preclude the reorganization from being disqualified or recharacterized. First, the distributions must equal less than all of the stock of the acquired corporation. Second, the distributions cannot cause the acquired corporation to cease being a member of the qualified group.
A reorganization is not disqualified or recharacterized because of one or more transfers of assets, stock, or both, of the acquired corporation, the acquiring corporation or the surviving corporation if the COBE requirement is satisfied and the acquired corporation, the acquiring corporation, or the surviving corporation does not terminate its corporate existence as part of the transfer. If only stock of the acquired corporation, the acquiring corporation, or the surviving corporation is transferred, the reorganization is protected against recharacterization or reclassification if the transfers do not result in the corporation ceasing to be a member of the qualified group.
T.D. 9361, 2007FED ¶47,070
Other References:
Code Sec. 368
CCH Reference - 2007FED ¶16,751
CCH Reference - 2007FED ¶16,752
Tax Research Consultant
CCH Reference - TRC CCORP: 24,060
CCH Reference - TRC REORG: 9,062.05