Tax News

CCH (cch.taxgroup.com) reports:

  The IRS has released final, temporary and proposed regulations to provide guidance concerning the distribution of stock of a controlled corporation acquired in a taxable transaction within five years of the distribution as described in Code Sec. 355(a)(3)(. The temporary regulations will affect corporations and their shareholders, and the text of the temporary regulations serves as the text of the proposed regulations.

  CCH Comment. The IRS has deemed its new regulations as "necesssary" due to amendments to Code Sec. 355(b) by the Tax Increase Prevention and Reconciliation Act of 2005 (P.L. 109-222), the Tax Relief and Health Care Act of 2006 (P.L. 109-432), and the Tax Technical Corrections Act of 2007 (P.L. 110-172.

  Under Code Sec. 355(a), a corporation may distribute stock in a corporation it controls to its shareholders without causing either the distributing corporation or its shareholders to recognize income, gain, or loss. Code Sec. 355(b)(1) requires that, immediately after the distribution, the distributing and controlled corporations must each be engaged in the active conduct of a trade or business. Code Sec. 355(b)(2) provides in part that a corporation is engaged in the active conduct of a trade or business if and only if it is engaged in the active conduct of a trade or business that has been actively conducted throughout the five-year period ending on the distribution date. It also provides that the trade or business must not have been acquired in a transaction in which gain or loss was recognized during the pre-distribution period.

  Under Code Sec. 355(b)(3)(A)-(C): (1) in determining whether a corporation meets the active business requirement, all members of the corporation's separate affiliated group (SAG) are treated as one corporation; (2) the term "SAG" means the affiliated group that would be determined under Code Sec. 1504(a) if the corporation were the common parent and the includible corporations provision under Code Sec. 1504(b) did not apply; and (3) if a parent corporation became a SAG member as a result of one or more taxable transactions, any trade or business conducted by such corporation at the time of SAG membership is treated as acquired in a taxable transaction.

  Under Code Sec. 355(a)(3)(, stock of a controlled corporation acquired by a distributing corporation in any transaction that is not a taxable transaction and that occurs within five years of the distribution of such stock is not treated as stock of the controlled corporation but, rather, as other property (also known as "hot stock"). Code Sec. 355(a)(3)( has been characterized as the "hot stock rule."

  The temporary regulations generally provide that controlled corporation stock acquired by the SAG of which the distributing corporation is the common parent within the pre-distribution period in a taxable transaction constitutes hot stock, except if the controlled corporation is a member of that SAG at any time after the acquisition but prior to the distribution. This provision renders obsolete Rev. Rul. 76-54, 1976-1 CB 96, and Rev. Rul. 65-286, 1965-2 CB 92. Transfers of controlled corporation stock owned by members of such SAG immediately before and immediately after the transfer are disregarded and not treated as acquisitions for purposes of the hot stock rule.

 
Reg. §1.355-2(g) generally exempted from the hot stock rule an acquisition of controlled corporation stock by the distributing corporation from a member of the affiliated group of which the distributing corporation was a member. The temporary regulations retain this affiliate exception, but the IRS will continue to study the impact that transfers between affiliates should have on satisfaction of the active trade or business requirement and application of the hot stock rule.

  The IRS is also considering issuing additional guidance under Code Sec. 355(a)(3)( on: (1) the effect of indirect acquisitions and the extent to which predecessor rules should apply for purposes of the hot stock rule; (2) the position that issuances of controlled stock by the controlled corporation to the distributing corporation in a taxable transaction do not give rise to hot stock; and (3) the effect of redemptions of controlled stock.

  Effective date. The final and temporary regulations are generally applicable for distributions occurring after December 15, 2008. However, unless taxpayers elect otherwise, the temporary regulations do not apply to any distribution occurring after December 15, 2008, pursuant to a transaction that is: (1) made under an agreement binding on December 15, 2008, and at all times thereafter; (2) described in a ruling request submitted to the IRS on or before such date; or (3) described on or before such date in a public announcement or in a filing with the Securities and Exchange Commission. Taxpayers may elect to apply the temporary regulations retroactively to distributions to which section 4(b) of the Tax Technical Corrections Act of 2007 (P.L. 110-172 applies (generally to distributions occurring after May 17, 2006).

  Public comments. The IRS requests comments on the clarity of the proposed rules and how they can be made easier to understand. Comments are also requested regarding:

  - the overall approach taken in the proposed rules, including the extent to which the definition of a taxable transaction should be the same under Code Sec. 355(a)(3)( and Code Sec. 355(b), and whether the exception for affiliate acquisitions should be the same under those sections;

  - the need for future guidance relating to predecessors of distributing corporations, acquisitions involving corporations that join the distributing corporation's SAG or the controlled corporation's SAG, predecessors of controlled corporations, the application of The E.L. Dunn Trust, 86 TC 745, Dec. 42,998 (Acq.), and the treatment of stock issuances by the controlled corporation to the distributing corporation; and

  - the potential application of the hot stock rule to redemptions of controlled corporation stock, specifically regarding the circumstances under which Code Sec. 355(a)(3)( should apply

  Written or electronic comments and requests for a public hearing must be received by March 16, 2009.

 
Rev. Ruls. 76-54, 1976-1 CB 96, and 65-286, 1965-2 CB 92, are obsoleted.

T.D. 9435, 2008FED ¶47,068

Proposed Regulations, NPRM REG-150670-07, 2008FED ¶49,842

Other References:

 
Code Sec. 355

  CCH Reference - 2008FED ¶16,461

  CCH Reference - 2008FED ¶16,461B

  CCH Reference - 2008FED ¶16,462

  CCH Reference - 2008FED ¶16,463

  CCH Reference - 2008FED ¶16,463D

  CCH Reference - 2008FED ¶16,466.27

  CCH Reference - 2008FED ¶16,466.855

 
Code Sec. 356

  CCH Reference - 2008FED ¶16,493.23

  Tax Research Consultant

  CCH Reference - TRC CCORP: 39,252.10
CCH Reference - TRC REORG: 30,104.05
CCH Reference - TRC REORG: 30,152.10
CCH Reference - TRC REORG: 30,154