Tax News

CCH (cch.taxgroup.com) reports:

  The IRS has issued clarifying amendments (T.D. 9361) to the rules regarding the effect of certain transfers of assets or stock on the continuing qualification of such transactions as reorganizations under Code Sec. 368(a). The regulations apply to transactions occurring on or after May 9, 2008, but do not apply to any transaction that occurs pursuant to a written agreement that is binding before May 9, 2008, and at all times after that.

  Under prior Reg. §1.368-2(k), a reorganization was not disqualified or recharacterized by subsequent transfers of assets or stock if the continuity of business enterprise (COBE) requirement was satisfied and the transfers qualified as distributions or other transfers. These final regulations clarify that transfers to former shareholders (other than the acquiring corporation) of the acquired corporation or the surviving corporation, do not qualify as distributions to the extent they constitute consideration for the shareholders' proprietary interests in either the acquired corporation or the surviving corporation. Such transfers call into question whether the underlying transaction satisfies the continuity of interest requirement as well as certain statutory limitations on permissible consideration (i.e., the "solely for voting stock" requirement set forth in Code Sec. 368(a)(1)( or (C). Accordingly, such transfers are outside the scope of the safe harbor protection afforded by these final regulations. However, this safe harbor continues to apply to transfers to former shareholders that do not constitute consideration for their proprietary interests, such as certain prorated dividend distributions by the acquiring corporation following a reorganization. Further, the regulations continue to provide safe harbor protection to certain "upstream" reorganizations followed by a transfer of acquired assets.

  These final regulations also clarify that safe harbor protection does not apply to a transfer by the former shareholders of the acquired corporation (other than the acquiring corporation) or the surviving corporation, of consideration initially received in the potential reorganization to the issuing corporation or a person related to the issuing corporation. In addition, these final regulations clarify that a transfer does not qualify as a distribution if the acquired corporation, the acquiring corporation, or the surviving corporation, terminates its corporate existence as part of the transfer.

T.D. 9396, 2008FED ¶47,032

Other References:

 
Code Sec. 368

  CCH Reference - 2008FED ¶16,752

  Tax Research Consultant

  CCH Reference - TRC CCORP: 24,060
CCH Reference - TRC REORG: 9,062.05