Tax News

CCH (cch.taxgroup.com) reports:

  The IRS has issued guidance that describes methodologies that it is considering publishing as safe harbors to be used in the determination of basis in stock that is acquired in a Code Sec. 368(a)(1)( ("B") reorganization or other transferred-basis transaction. The methodologies are intended to respond to issues raised as a result of substantial changes in market practice since the issuance of Rev. Proc. 81-70, 1981-2 CB 729. Comments are requested on the proposed methodologies, and, pending further guidance, taxpayers may rely on the safe harbors set forth in the guidance.

  A "B" reorganization is the acquisition by one corporation of the stock of a target corporation, solely in exchange for the voting stock of the acquiring corporation or its parent, if immediately after the exchange the acquiring corporation is in control of the target. Under Code Sec. 362, if a corporation acquires property in a transferred-basis transaction, including a B reorganization or a Code Sec. 351 transfer from controlling stockholders, the property so acquired keeps the same basis as it had in the hands of the transferor.

Background

  The IRS issued Rev. Proc. 81-70 to facilitate the determination of basis in B reorganizations due to two problems encountered by taxpayers in attempting to establish basis in acquired stock: (1) the acquisition of basis information from target corporation shareholders surrendering stock of widely held corporations was time-consuming, burdensome, and costly; and (2) not all surrendering shareholders were responding to requests for basis information. Rev. Proc. 81-70 provides guidelines for the use of statistical sampling techniques and estimation techniques to determine the basis of stock acquired in a B reorganization where the burden of obtaining the actual basis figures is unreasonable.

  At the time Rev. Proc. 81-70 was issued, most stock was registered stock, so that the name of the beneficial owner of the stock was recorded by the issuing corporation's stock transfer agent on its books. Today, however, stock of public companies is generally held in "street name," whereby the stock is held by a nominee (usually a clearinghouse or other financial institution holding stock on behalf of their members or customers) and the transfer agent's books list the nominee as the owner of the stock. Because there are often several tiers of nominee owners, each subject to confidentiality and other constraints that could bar the release of information, the identification of the beneficial owners of large portions of public companies, and their bases in those interests, can be nearly impossible to discover. Further, the information needed to identify the nominee holders tends to dissipate fairly quickly.

  The IRS, having studied the issues raised by nominee stock holdings and having received public comments on these issues, has concluded that the guidelines of Rev. Proc. 81-70 need to be expanded to address these issues. Expanded guidance (referred to by the IRS as "Expanded Rev. Proc. 81-70") will also apply, not only to B reorganizations but, also, to all transferred basis transactions.

Proposed Guidance

  In order to address the issues raised by nominee stock holdings and to simplify the determination of basis for small stock holdings, "Expanded Rev. Proc. 81-70" will include several safe harbor provisions. Each safe harbor will apply to a specified group of surrendering shareholders and will prescribe a methodology that can be used to determine those shareholders' bases in surrendered stock.

  In general, a determination of basis will be considered timely if it is completed within two years of the later of the date of the transferred basis transaction and the date that "Expanded Rev. Proc. 81-70" becomes effective. A previously completed basis determination will be considered timely if made compliant with the provisions of "Expanded Rev. Proc. 81-70" within two years of the date that "Expanded Rev. Proc. 81-70" becomes effective.

  Notwithstanding any safe harbor prescribed in "Expanded Rev. Proc. 81-70," if the acquiring corporation has, or acquires, actual knowledge of a surrendering shareholder's actual basis in a share of surrendered target stock, the acquirer's allowable basis in the share is equal to that of the surrendering shareholder's basis.

  If an acquiring corporation complies with the terms of a safe harbor, including those provisions that apply to all such safe harbors, the IRS will not assert an alternative method to determine a corporation's allowable basis in stock.

  Safe harbor for target stock surrendered by or on behalf of reporting shareholders. Under this safe harbor, the basis of stock surrendered by reporting shareholders must be determined by survey. In general, a survey must be done in accordance with guidelines set forth in Rev. Proc. 81-70.

  Safe harbor for target stock surrendered by or on behalf of registered nonreporting shareholders. Under this safe harbor, the basis of stock surrendered by registered, nonreporting shareholders must be determined by the certificate method, as described in the notice.

  Safe harbor for target stock surrendered by nominees on behalf of nonreporting shareholders. Under this safe harbor, the basis of all stock surrendered by nominees on behalf of nonreporting shareholders is determined under the basis modeling method, as described in the guidance.

  Reporting requirements. Corporations acquiring target stock in a transferred basis transaction will be treated as satisfying their reporting requirements under Reg. §§1.351-3 and 1.368-3 with respect to the return for the tax year in which the transaction is completed if the corporation includes a statement on or with the return stating that a basis study is pending with respect to the acquired stock.

  Interim use of safe harbor methodologies. "Expanded Rev. Proc. 81-70" will be effective for transferred-basis transactions on or after the date it is issued. Prior to the issuance of "Expanded Rev. Proc. 81-70," taxpayers may use the methodologies of any safe harbor described above to determine the basis of target stock acquired in any transferred-basis transaction that occurs prior to issuance. In such instances, the timeliness requirement will be treated as satisfied if the study is completed within two years of the later of the date of the transferred-basis transaction or January 12, 2009.

Request for Comments

  Comments are requested as to whether the approaches described in the notice should be adopted and to what extent, if any, the approaches should be further combined or modified to produce a set of rules that is both administrable and reflective of statutory intent. The IRS is especially interested in comments regarding whether a simpler methodology, such as one that would determine the basis of all surrendered shares by using a weighted average trading price, would be helpful to taxpayers and appropriate for the tax system. In addition, comments are specifically requested regarding the determination of basis in atypical transferred-basis transactions, such as acquisitions in bankruptcy reorganizations, acquisitions involving foreign transfer agents, and acquisitions involving foreign corporations that may be subject to the rules of Reg. §1.367(b)-13.

Notice 2009-4,
2008FED ¶46,695

Other References:

 
Code Sec. 351

  CCH Reference - 2008FED ¶16,405.01

 
Code Sec. 362

  CCH Reference - 2008FED ¶16,612.162

 
Code Sec. 368

  CCH Reference - 2008FED ¶16,753.21

  Tax Research Consultant

  CCH Reference - TRC CCORP: 39,304.10