Tax News

CCH (cch.taxgroup.com) reports:

  The IRS has issued final, temporary and proposed regulations addressing the use of controlled corporations to avoid the application of
Code Sec. 304. The regulations apply to transactions that are entered into with a principal purpose of avoiding the application of Code Sec. 304 to a corporation that is controlled by the issuing corporation in the transaction, or to a corporation that controls the acquiring corporation in the transaction. The regulations affect shareholders treated as receiving distributions in redemption of stock by reason of Code Sec. 304, and are effective on December 29, 2009.

Background

 
Code Sec. 304(a)(1) generally provides that if one or more persons are in control of each of two corporations, and one such corporation acquires stock of the other corporation in exchange for property from the person or persons so in control, the property is treated as received in redemption of the stock of the acquiring corporation. Code Sec. 304(a)(2) generally provides that if in exchange for property, the acquiring corporation acquires stock of the issuing corporation from a shareholder of the issuing corporation, and the issuing corporation controls the acquiring corporation, the shareholder is treated as receiving the property in redemption of the stock of the issuing corporation. Under Code Sec. 304(b)(2), the determination of the amount of the distribution that is a dividend is made as if the property were distributed by the acquiring corporation to the extent of its earnings and profits, and then by the issuing corporation to the extend of its earnings and profits. If the acquiring corporation is foreign, the amount of earnings and profits that are taken into account for this purpose are limited by Code Sec. 304(b)(5).

  In June 1988, the IRS issued Temporary Reg. §1.304-4T to address transactions that are entered into with a principal purpose of avoiding the application of Code Sec. 304. The regulation provided that for purposes of determining the amount constituting a dividend and source thereof, a corporation (deemed acquiring corporation) will, at the discretion of an IRS District Director (now known as the Director of Field Operations), be considered to have acquired for property the stock of another corporation that is controlled by the deemed acquiring corporation, if one of the principal purposes for creating, organizing, or funding the acquiring corporation, through capital contributions or debt, is to avoid the application of Code Sec. 304 to the deemed acquiring corporation

Final and Temporary Regulations

  The final and temporary regulations provide an anti-avoidance rule similar to Temporary Reg. §1.304-4T, but that applies to transactions entered into with a principal purpose of avoiding the treatment of a corporation as the issuing corporation. The regulations provide that for purposes of determining the amount of a property distribution that is a dividend, and the source thereof, under Code Sec. 304(b)(2), the acquiring corporation will be treated as acquiring for property the stock of a corporation (deemed issuing corporation) that is controlled by the issuing corporation, if, in connection with the acquisition by the acquiring corporation, the issuing corporation acquired stock of the deemed issuing corporation with a principal purpose of avoiding the application of
Code Sec. 304 to the deemed issuing corporation.

  The regulations also modify Temporary Reg. §1.304-4T to make the anti-avoidance rule self-executing, rather than at the discretion of the District Director (Director of Field Operations). Further, the regulations clarify that the anti-avoidance rule may apply even if the funding for the acquiring corporation is from an unrelated party.

Proposed Regulations

  The text of the temporary regulations also serves as the text of the proposed regulations. Comments and requests for a public hearing must be received by March 29, 2010.

T.D. 9477, 2010FED ¶47,007

Proposed Regulations, NPRM REG-132232-08, 2010FED ¶49,440

Other References:

 
Code Sec. 304

  CCH Reference - 2009FED ¶15,377CJ

  CCH Reference - 2009FED ¶15,377D

  Tax Research Consultant

  CCH Reference - TRC CCORP: 21,452

  CCH Reference - TRC CCORP: 21,454

  CCH Reference - TRC CCORP: 24,060