[Federal Register Volume 59, Number 246 (Friday, December 23, 1994)]
[Unknown Section]
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From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 94-31287]
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[Federal Register: December 23, 1994]
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DEPARTMENT OF THE TREASURY
Internal Revenue Service
26 CFR Part 1
[CO-993-71]
RIN 1545-AB21
Controlling Corporation's Basis Adjustment in Its Controlled
Corporation's Stock Following a Triangular Reorganization
AGENCY: Internal Revenue Service (IRS), Treasury.
ACTION: Withdrawal of notice of proposed rulemaking; notice of proposed
rulemaking and notice of public hearing.
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SUMMARY: This document withdraws proposed regulations published on
January 2, 1981 at 46 FR 113 and 114, and contains proposed regulations
under sections 358, 1032, and 1502 of the Internal Revenue Code of
1986. The proposed regulations provide rules for adjusting the basis of
a controlling corporation in the stock of a controlled corporation as
the result of certain triangular reorganizations involving the stock of
the controlling corporation. The proposed regulations also generally
provide that the use of the controlling corporation's stock provided by
the controlling corporation pursuant to the plan of reorganization is
treated as a disposition of those shares by the controlling
corporation. The proposed regulations affect corporations that are
parties to such triangular reorganizations.
DATES: Written comments and outlines of oral comments to be presented
at the public hearing scheduled for March 31, 1995, at 10:00 a.m., must
be received by March 10, 1995.
ADDRESSES: Send submissions to: CC:DOM:CORP:T:R (CO-993-71), room 5228,
Internal Revenue Service, P.O. Box 7604, Ben Franklin Station,
Washington, DC 20044. In the alternative, submissions may be hand
delivered between the hours of 8 a.m. and 5 p.m. to: CC:DOM:CORP:T:R
(CO:993-71), Courier's Desk, Internal Revenue Service, 1111
Constitution Avenue, NW, Washington, DC. The hearing will be held in
the IRS auditorium, 1111 Constitution Avenue, NW, Washington, DC.
FOR FURTHER INFORMATION CONTACT: Concerning the proposed regulations,
Rose L. Williams, (202) 622-7550; concerning submissions and the
hearing, Michael Slaughter, (202) 622-7190 (not toll-free numbers).
SUPPLEMENTARY INFORMATION:
Background
This document contains proposed amendments to the Income Tax
Regulations (26 CFR part 1) under sections 358, 1032, and 1502. The
proposed regulations provide rules for adjusting the basis of a
controlling corporation in the stock of a controlled corporation as the
result of certain triangular reorganizations involving the stock of the
controlling corporation. The proposed regulations also generally
provide that the use of the controlling corporation's stock provided by
the controlling corporation pursuant to the plan of reorganization is
treated as a disposition of those shares by the controlling
corporation.
Explanation of Proposed Regulations
The Internal Revenue Code of 1986 (Code) provides general
nonrecognition treatment in three-party reorganizations. A three-party
reorganization can be structured as a reorganization in which (1) a
parent corporation (P) acquires the assets or stock of a target
corporation (T) in exchange for P stock and then transfers the acquired
assets or stock to a subsidiary corporation (S) (a parent/drop
reorganization), or (2) S acquires the assets or stock of T, or S
merges into T, in a transaction in which the T shareholders receive P
stock in exchange for their T stock (a triangular reorganization).
A. Development of Statutory Provisions
Prior to 1954, gain or loss generally was recognized in three-party
reorganizations because of the remote continuity of interest doctrine
enunciated in Groman v. Commissioner, 302 U.S. 82 (1937), and Helvering
v. Bashford, 302 U.S. 454 (1938).
In 1954, Congress restricted the application of the remote
continuity of interest doctrine in certain three-party reorganizations
by enacting section 368(a)(2)(C) and amending the predecessor to
section 368(a)(1)(C) (section 112(g)(1)(C) of the Internal Revenue Code
of 1939). Section 368(a)(2)(C) provides that P's transfer of T assets
acquired in a reorganization under section 368(a)(1)(A) (merger or
consolidation) or 368(a)(1)(C) (asset acquisition) to S does not
disqualify the reorganization. Section 368(a)(1)(C) provides that S can
acquire T assets directly in exchange for P stock (a triangular C
reorganization).
In 1964, Congress further limited the scope of the remote
continuity of interest doctrine by amending section 368(a)(2)(C) to
provide that P can transfer T stock acquired in a reorganization under
section 368(a)(1)(B) (stock acquisition) to S without disqualifying the
reorganization. Section 368(a)(1)(B) was also amended to provide that S
can acquire T stock directly in exchange for P stock (a triangular B
reorganization).
In 1968, Congress enacted section 368(a)(2)(D) to provide that a
transaction is not disqualified under sections 368 (a)(1)(A) or
(a)(1)(G) when S acquires substantially all of the T assets with the
shareholders of T receiving P stock in exchange for their T stock (a
forward triangular merger).
In 1971, Congress enacted section 368(a)(2)(E) to provide that a
transaction otherwise qualifying under paragraph (a)(1)(A) is not
disqualified when S merges into T with the shareholders of T receiving
P stock in exchange for their T stock (a reverse triangular merger).
B. Failure of Statutory Amendments To Deal With Certain Effects of
Triangular Reorganizations
Although Congress has increased the number of three-party
reorganizations that qualify for general nonrecognition treatment, it
has not provided explicit statutory rules concerning certain effects of
those reorganizations. For example, Congress has not provided rules
regarding the adjustments, if any, to be made to P's basis in its S or
T stock, as applicable, following a triangular reorganization. Also,
Congress has not explicitly provided that S does not recognize gain on
its exchange of P stock for T assets or stock in a triangular
reorganization. These issues do not arise in a parent/drop
reorganization because section 358 applies to determine P's basis in S
stock on P's transfer of T's assets or stock to S, and section 1032
applies to P's exchange of its own stock for T assets or stock.
C. 1981 Proposed Regulations
In 1981, regulations were proposed under sections 358 and 1032 that
generally would have conformed certain tax consequences of a triangular
reorganization with the consequences of its counterpart parent/drop
reorganization. To achieve this conformity, the 1981 proposed
regulations employed mechanical rules that generally simulated the
basis effects that would have resulted if P had acquired the T assets
or stock directly and then transferred the assets or stock to S
(sometimes referred to as an over-the-top model). Also, under the 1981
proposed regulations, S did not recognize any gain or loss on its use
of P stock in a forward triangular merger or a triangular B or C
reorganization.
Comments received on the 1981 proposed regulations generally agreed
with the over-the-top model for basis determinations in triangular
reorganizations.
D. Justification of the Over-The-Top Model
Adoption of the over-the-top model is appropriate for triangular
reorganizations. First, the basis results in a parent/drop
reorganization are clearly defined by the Code. The paired enactment
pattern of legislation involving section 368 evidences Congressional
intent that the basis results in a triangular reorganization should
conform to the basis results in its counterpart parent/drop
reorganization. The exceptions to this pattern were the provisions
dealing with the forward triangular merger and the reverse triangular
merger. However, Congress recognized that even the forward triangular
merger and the reverse triangular merger had counterparts. See S. Rep.
No. 1563, 90th Cong., 2d Sess. 2 (1968) (a forward triangular merger is
like a section 368(a)(1)(A) merger with a subsequent transfer of assets
under section 368(a)(2)(C)); S. Rep. No. 1533, 91st Cong., 2d Sess. 2
(1970) (a reverse triangular merger should be afforded similar
treatment to a forward triangular merger). Achieving comparability
between a triangular reorganization and its counterpart parent/drop
reorganization furthers sound tax policy by treating economically
comparable reorganizations similarly.
Second, S stock owned by P can be viewed as a surrogate for the T
assets or stock acquired by S in the reorganization. Section 362(b)
requires that the acquiring corporation take a transferred basis in the
assets or stock acquired. Although section 362(b) does not literally
apply to P as a party to a triangular reorganization (because T assets
or stock are not actually acquired by P), the S stock can be viewed as
a surrogate for the assets or stock acquired by S. Thus, the principles
of section 362(b) should govern the adjustment to P's basis in its S
stock. Consequently, a triangular reorganization should result in an
adjustment to P's basis in its S stock reflecting the basis in the T
assets or stock acquired by S. Furthermore, by treating the S stock as
a surrogate for the T assets or stock acquired by S, the over-the-top
model achieves neutrality for P between a sale of the S stock and a
sale by S of the assets or stock acquired in the reorganization.
E. The New Proposed Regulations
1. Retention of the Over-The-Top Model
This document withdraws the proposed regulations published on
January 2, 1981 at 46 FR 113 and 114. It proposes new regulations under
sections 358 and 1502 that generally employ an over-the-top model for
determining P's basis adjustment in S or T stock as a result of certain
triangular reorganizations. It also proposes new regulations under
section 1032 that provide that the use of P stock provided by P to S
pursuant to the plan of reorganization is treated as a disposition of
those shares by P. Consequently, neither P nor S has taxable gain or
deductible loss on the exchange.
In contrast to the mechanical rules employed in the 1981 proposed
regulations, the new proposed regulations set forth general rules for
adjusting basis. For example, the new proposed regulations provide that
P's basis in its S stock immediately after a forward triangular merger
described in sections 368 (a)(1)(A) and (a)(2)(D) is adjusted (with
certain modifications described below) as if P acquired the T assets
(and any liabilities assumed or to which the T assets were subject)
directly from T in a transaction in which P's basis in the T assets was
determined under section 362(b), and P then transferred the T assets
(and liabilities) to S in a transaction in which P's basis in the S
stock was adjusted under section 358. Despite the change in format from
mechanical rules to general rules, the new proposed regulations and the
1981 proposed regulations should produce similar tax effects, with
limited differences that are noted in the discussion below.
The over-the-top model is not intended to construct a transfer of T
assets or stock from P to S for any purpose of the Code except the
determination of P's basis in its S or T stock. Thus, for example,
section 357(c) does not apply if T's liabilities exceed T's aggregate
asset basis (even though it would apply in a parent/drop
reorganization). Furthermore, section 1001 applies if S exchanges its
assets for T's assets or stock (even though in a parent/drop
reorganization, S's consideration would have to be distributed to P
with the consequences determined under sections 301 and 311).
2. Specific Issues
(a) Decrease for consideration not provided by P. The 1981 proposed
regulations generally would have required P to reduce its basis in its
S or T stock by the fair market value of the consideration not provided
by P in the reorganization. New proposed Sec. 1.358-6(d) similarly
requires a reduction in P's basis in its S or T stock by the fair
market value of consideration not provided by P (including any P stock
not provided by P pursuant to the plan of reorganization).
(b) Decreases under the model and negative basis. A strict
application of the over-the-top model would require P to adjust its
historic basis in its S stock, if any, even below zero. For example,
the model relies in part on section 358 which requires a reduction in
basis for the amount of liabilities assumed or to which the T assets
are subject. If the amount of liabilities assumed exceeds the basis of
the T assets acquired, the resulting net negative adjustment could
reduce P's basis in its S stock below zero. Similarly, the decrease for
the fair market value of consideration not provided by P could reduce
P's basis below zero.
The new proposed regulations permit a net negative adjustment to
P's historic basis in S only in the case in which P and S, or P and T,
as applicable, are members of a consolidated group following the
triangular reorganization. In the consolidated context, the adjustment
may result in an excess loss account under Sec. 1.1502-19 for P in its
S or T stock. See new proposed Sec. 1.1502-30.
The new proposed regulations preclude a net negative adjustment in
a nonconsolidated context. See new proposed Secs. 1.358-6 (c)(1)(ii)
and (d)(2). The difference in result is attributable to the fact that
the consolidated return regulations provide for an excess loss account,
a concept similar to negative basis, while the concept of negative
basis generally is not used under the Code. Thus, in the
nonconsolidated context, the adjustment does not result in a negative
basis. Moreover, in the nonconsolidated context, the adjustment does
not cause a reduction to P's historic basis even if that reduction
would not result in a negative basis. In this way, the new proposed
regulations do not disfavor the use of an existing S in the
reorganization because any historic basis of P in its S stock is not
reduced.
(c) Reverse triangular mergers. The 1981 proposed regulations
generally would have provided that P's basis in T stock in the case of
a reverse triangular merger described in sections 368 (a)(1)(A) and
(a)(2)(E) was adjusted as if T's assets were acquired in the
reorganization. A limited transition rule determined P's basis under
section 362(b) (as if the transaction were described in section
368(a)(1)(B)) for reverse triangular mergers occurring before March 3,
1981, that were described in Rev. Rul. 67-448, 1967-2 C.B. 144, if the
resulting basis determined under section 362(b) would have been greater
than under the general rule.
New proposed Sec. 1.358-6(c)(2)(i) continues the general rule that
P's basis in its T stock in the case of a reverse triangular merger is
adjusted as if T's assets were acquired. However, if P receives less
than all of T's stock in a reverse triangular merger, P's basis in the
T stock received is determined only with respect to an allocable
portion of the basis determined under new proposed Sec. 1.358-
6(c)(2)(i).
In addition, new proposed Sec. 1.358-6(c)(2)(iii) contains a
special rule if the transaction qualifies as both a reverse triangular
merger and a stock acquisition under section 368(a)(1)(B). Under this
rule, P may adjust its basis in its T stock based either on T's asset
basis (under the rules set forth in these proposed regulations for
forward triangular reorganizations) or on the aggregate basis of the T
stock surrendered in the transaction (as if the transaction were a
reorganization under section 368(a)(1)(B)).
(d) Section 1032 nonrecognition treatment. The 1981 proposed
regulations would have extended section 1032 nonrecognition treatment
to S on its use of P stock in certain triangular reorganizations.
New proposed Sec. 1.1032-2 generally continues this rule, by
providing that the use of P stock provided by P to S, or directly to T
or the T shareholders on behalf of S, pursuant to the plan of
reorganization is treated as a disposition of those shares by P.
Consequently, neither P nor S has taxable gain or deductible loss on
the exchange. However, to the extent that S exchanges P stock in the
reorganization which it did not receive from P pursuant to the plan of
reorganization, S recognizes gain or loss on the exchange of that
stock.
F. Proposed Effective Dates
Generally, new proposed Sec. 1.358-6 will apply with respect to all
triangular reorganizations occurring on or after December 23, 1994. In
addition, with respect to reverse triangular mergers occurring before
December 23, 1994, P may adjust its basis in its T stock as if P
acquired the stock of the former T shareholders in a transaction in
which its basis was determined under section 362(b) (i.e., as a section
368(a)(1)(B) reorganization, without regard to whether the transaction
qualifies as such).
Taxpayers should be aware that, although these new proposed
regulations will apply only to triangular reorganizations occurring on
or after December 23, 1994, the IRS and Treasury believe that any
adjustment to P's basis in its S or T stock (as applicable) following a
triangular reorganization occurring before December 23, 1994, must be
consistent with the adjustment that would be made if P had made the
acquisition directly and P then transferred the assets to a controlled
subsidiary. With respect to reverse triangular mergers occurring before
December 23, 1994, see new proposed Sec. 1.358-6(f)(2).
New proposed Sec. 1.1032-2 will apply with respect to certain
triangular reorganizations occurring on or after December 23, 1994.
With respect to triangular reorganizations occurring before December
23, 1994, see, e.g., Sec. 1.1032-1 and Rev. Rul. 57-278, 1957-1 C.B.
124.
New proposed Sec. 1.1502-30 will apply with respect to triangular
reorganizations occurring on or after December 23, 1994, in which P and
S, or P and T, as applicable, are members of a consolidated group
following the triangular reorganization. For triangular reorganizations
occurring before December 23, 1994, in which P and S, or P and T, as
applicable, are members of a consolidated group following the
triangular reorganization, any adjustments to P's basis in its S or T
stock (as applicable) must be consistent with the rules applicable for
nonconsolidated taxpayers. But see Secs. 1.1502-31 (59 FR 41666 (Aug.
15, 1994)) and -31T (26 CFR Sec. 1.1502-31T (1994)) for rules
determining basis following transactions that are group structure
changes.
G. Request for Comments Concerning Related Party and Cross Ownership
Issues
The IRS and Treasury request comments concerning the tax
consequences that arise in cases of restructurings involving related
parties and, more generally, involving cross ownership. For example,
Rev. Rul. 69-413, 1969-2 C.B. 55, assumes that the restructuring of an
affiliated group described therein is a triangular C reorganization. It
is arguable, though, that the restructuring should have been viewed as
a reorganization under section 368(a)(1)(D) and treated accordingly.
The tax consequences, including the effect on P's basis in S, are
different depending on the characterization of the restructuring. After
reviewing the comments received in response to this request, the IRS
may withdraw, revoke, or obsolete certain rulings.
There may be some historic cross ownership of stock between P and
T, or S and T that is affected by a triangular reorganization. For
example, S may be a historic owner of some of the T stock outstanding
at the time that T merges into S, but S receives no P stock in exchange
for its T stock. Comments are requested whether such a merger qualifies
as a forward triangular merger, and as to how and when tax consequences
relating to the extinguishment of S's stock ownership in T should be
accounted for.
Special Analyses
It has been determined that this notice of proposed rulemaking is
not a significant regulatory action as defined in Executive Order
12866. Therefore, a regulatory assessment is not required. It has also
been determined that section 553(b) of the Administrative Procedure Act
(5 U.S.C. chapter 5) and the Regulatory Flexibility Act (5 U.S.C.
chapter 6) do not apply to these regulations, and, therefore, a
Regulatory Flexibility Analysis is not required. Pursuant to section
7805(f) of the Internal Revenue Code, this notice of proposed
rulemaking will be submitted to the Chief Counsel for Advocacy of the
Small Business Administration for comment on its impact on small
business.
Comments and Public Hearing
Before these proposed regulations are adopted as final regulations,
consideration will be given to any written comments (a signed original
and eight (8) copies) that are submitted timely to the IRS. All
comments will be available for public inspection and copying.
A public hearing is scheduled for March 31, 1995, at 10 a.m., in
the IRS auditorium. Because of access restrictions, visitors will not
be admitted beyond the Internal Revenue Building lobby more than 15
minutes before the hearing starts.
The rules of 26 CFR 601.601(a)(3) apply to the hearing.
Persons who wish to present oral comments at the hearing must
submit written comments by March 10, 1995, and submit an outline of the
topics (signed original and eight (8) copies) to be discussed by March
10, 1995.
A period of 10 minutes will be allotted to each person for making
comments.
An agenda showing the scheduling of the speakers will be prepared
after the deadline for receiving outlines has passed. Copies of the
agenda will be available free of charge at the hearing.
Drafting Information
The principal author of these regulations is Rose L. Williams,
Office of Assistant Chief Counsel (Corporate). However, other personnel
from the IRS and Treasury Department participated in their development.
List of Subjects in 26 CFR Part 1
Income taxes, Reporting and recordkeeping requirements.
Proposed Amendments to the Regulations
Accordingly, 26 CFR part 1 is proposed to be amended as follows:
PART 1--INCOME TAXES
Paragraph 1. The authority citation for part 1 continues to read in
part:
Authority: 26 U.S.C. 7805 * * *
Section 1.1502-30 also issued under 26 U.S.C. 1502 * * *
Par. 2. Section 1.358-6 is proposed to be added to read as follows:
Sec. 1.358-6 Stock basis in certain triangular reorganizations.
(a) Scope. This section provides rules for computing the basis of a
controlling corporation in the stock of a controlled corporation as the
result of certain reorganizations involving the stock of the
controlling corporation as described in paragraph (b) of this section.
The rules of this section are in addition to rules under other
provisions of the Code and principles of law. See, e.g., section 1001
for the recognition of gain or loss by the controlled corporation on
the exchange of property for the assets or stock of a target
corporation in a reorganization described in section 368.
(b) Triangular reorganizations--(1) Nomenclature. For purposes of
this section--
(i) P is a corporation--
(A) that is a party to a reorganization,
(B) that is in control (within the meaning of section 368(c))
immediately before the reorganization of another party to the
reorganization, and
(C) whose stock is transferred pursuant to the reorganization.
(ii) S is a corporation--
(A) that is a party to the reorganization, and
(B) that is controlled by P before the reorganization.
(iii) T is a corporation that is another party to the
reorganization.
(2) Definitions of triangular reorganizations. This section applies
to the following reorganizations (which are referred to collectively as
triangular reorganizations):
(i) Forward triangular merger. A forward triangular merger is a
statutory merger of T and S, with S surviving, that qualifies as a
reorganization under section 368(a)(1) (A) or (G) by reason of the
application of section 368(a)(2)(D).
(ii) Triangular C reorganization. A triangular C reorganization is
an acquisition by S of substantially all of T's assets in exchange for
P stock in a transaction that qualifies as a reorganization under
section 368(a)(1)(C).
(iii) Reverse triangular merger. A reverse triangular merger is a
statutory merger of S and T, with T surviving, that qualifies as a
reorganization under section 368(a)(1)(A) by reason of the application
of section 368(a)(2)(E).
(iv) Triangular B reorganization. A triangular B reorganization is
an acquisition by S of T stock in exchange for P stock in a transaction
that qualifies as a reorganization under section 368(a)(1)(B).
(c) General rules. Subject to the special rule provided in
paragraph (d) of this section, P's basis in the stock of S or T, as
applicable, immediately after a triangular reorganization, is adjusted
as a result of the triangular reorganization under the following
rules--
(1) Forward triangular merger or triangular C reorganization--(i)
In general. In a forward triangular merger or a triangular C
reorganization, P's basis in its S stock is adjusted as if--
(A) P acquired the T assets acquired by S in the reorganization
(and P assumed any liabilities which S assumed or to which the T assets
were subject) directly from T in a transaction in which P's basis in
the T assets was determined under section 362(b); and
(B) P transferred the T assets (and liabilities assumed or to which
the T assets were subject) to S in a transaction in which P's basis in
S stock was determined under section 358.
(ii) Limitation. If, in applying section 358, the amount of T
liabilities assumed by S or to which the T assets are subject exceeds
T's aggregate adjusted basis in its assets, the amount of the
adjustment under paragraph (c)(1)(i) of this section is zero. P
recognizes no gain under section 357(c) as a result of a triangular
reorganization.
(2) Reverse triangular merger--(i) In general. Except as provided
in paragraph (c)(2)(ii) of this section, in a reverse triangular
merger, P's basis in T stock is adjusted as if T merged into S in a
forward triangular merger to which paragraph (c)(1) of this section
applied.
(ii) Allocable share. If P receives less than all of T's stock in a
reverse triangular merger in which P determines its basis in its T
stock under paragraph (c)(2)(i) of this section, P's basis in the T
stock received is adjusted only by an allocable portion of the basis
adjustment otherwise determined under paragraph (c)(2)(i) of this
section.
(iii) Reverse triangular merger that also qualifies under section
368(a)(1)(B). Notwithstanding paragraph (c)(2)(i) of this section, if a
reorganization qualifies as both a reverse triangular merger and a
reorganization under section 368(a)(1)(B), P can--
(A) adjust the basis in its T stock as if paragraph (c)(2)(i) of
this section applied; or
(B) determine the basis in its T stock acquired as if P acquired
such stock from the former T shareholders (other than P) in a
transaction in which P's basis in the T stock was determined under
section 362(b).
(3) Triangular B reorganization. In a triangular B reorganization,
P's basis in its S stock is adjusted as if--
(i) P acquired the T stock acquired by S in the reorganization
directly from the T shareholders in a transaction in which P's basis in
the T stock was determined under section 362(b); and
(ii) P transferred the T stock to S in a transaction in which P's
basis in its S stock was determined under section 358.
(4) Examples. The rules of this paragraph (c) are illustrated by
the following examples. For purposes of these examples, P, S, and T are
domestic corporations, P and S do not file consolidated returns, P owns
all of the only class of S stock, the P stock exchanged in the
transaction satisfies the requirements of the applicable triangular
reorganization provisions, and the facts set forth the only corporate
activity.
Example 1. Forward triangular merger. (a) Facts. T has assets
with an aggregate basis of $60 and fair market value of $100 and no
liabilities. Pursuant to a plan, P forms S with $5 cash (which S
retains), and T merges into S. In the merger, the T shareholders
receive P stock worth $100 in exchange for their T stock. The
transaction is a reorganization to which sections 368(a)(1)(A) and
(a)(2)(D) apply.
(b) Basis adjustment. Under paragraph (c)(1) of this section, P
adjusts its basis in S stock immediately after the reorganization by
treating P as if it acquired the T assets acquired by S in the
reorganization directly from T in a transaction in which P's basis
in the T assets was determined under section 362(b). Under section
362(b), P would have an aggregate basis of $60 in the T assets. P is
then treated as if it transferred the T assets to S in a transaction
in which P's basis in the S stock was determined under section 358.
Under section 358, P's basis in its S stock would be increased by
the $60 basis in the T assets deemed transferred. Consequently, P
has a $65 basis in its S stock immediately after the reorganization.
(c) Use of pre-existing S. The facts are the same as paragraph
(a) of this Example 1, except that S is an operating company with
substantial assets that has been in existence for several years. P
has a $110 basis in the S stock. Under paragraph (c)(1) of this
section, P's $110 basis in its S stock immediately before the
reorganization is increased by the $60 basis in the T assets deemed
transferred. Consequently, P has a $170 basis in its S stock
immediately after the reorganization.
(d) Mixed consideration. The facts are the same as paragraph (a)
of this Example 1, except that the T shareholders receive P stock
worth $80 and $20 cash from P. Under section 358, P's basis in its S
stock would be increased by the $60 basis in the T assets deemed
transferred. Consequently, P has a $65 basis in its S stock
immediately after the reorganization (the $5 initial basis
representing the $5 cash retained by S, adjusted by $60).
(e) Liabilities. The facts are the same as paragraph (a) of this
Example 1, except that T's assets are subject to $50 of liabilities,
and the T shareholders receive $50 of P stock in exchange for their
T stock. Under section 358, P's basis in its S stock would be
increased by the $60 basis in the T assets deemed transferred and
decreased by the $50 of liabilities to which the T assets are
subject. Consequently, P has a net adjustment of $10 in its S stock,
and P has a $15 basis in its S stock immediately after the
reorganization.
(f) Liabilities in excess of basis. The facts are the same as in
paragraph (a) of this Example 1, except that T's assets are subject
to liabilities of $90, and the T shareholders receive $10 of P stock
in exchange for their T stock in the reorganization. Under paragraph
(c)(1)(ii) of this section, the adjustment under paragraph (c) of
this section is zero if the amount of the liabilities assumed or to
which the acquired assets are subject exceeds the aggregate adjusted
basis in T's assets. Consequently, P has no adjustment in its S
stock, and P has a $5 basis in its S stock immediately after the
reorganization.
Example 2. Reverse triangular merger. (a) Facts. T has assets
with an aggregate basis of $60 and a fair market value of $100 and
no liabilities. S is an operating company with substantial assets
that has been in existence for several years. P has a $110 basis in
its S stock. Pursuant to a plan, S merges into T with T surviving.
In the merger, the T shareholders receive P stock worth $100 in
exchange for their T stock. The transaction is a reorganization to
which sections 368(a)(1)(A) and (a)(2)(E) apply. Because S is a
previously existing operating company with substantial assets, the
transaction does not qualify as a reorganization under section
368(a)(1)(B).
(b) Basis adjustment. Under paragraph (c)(2)(i) of this section,
P's basis in its T stock immediately after the reorganization is the
same basis that P would have had in S stock if T had merged into S
in a forward triangular merger with S surviving. In such a case, P's
$110 basis in its S stock immediately before the reorganization
would have been increased by the $60 basis of the T assets deemed
transferred. Consequently, P has a $170 basis in its T stock
immediately after the reorganization.
(c) Reverse triangular merger that also qualifies under section
368(a)(1)(B). The facts are the same as in paragraph (a) of this
Example 2, except that P forms S pursuant to the plan of
reorganization with $5 cash. The T shareholders have an aggregate
basis in their T stock of $85 immediately before the reorganization.
The reorganization qualifies as both a reverse triangular merger and
a reorganization under section 368(a)(1)(B). Under paragraph
(c)(2)(iii) of this section, P may adjust its basis in its T stock
immediately after the reorganization either as if paragraph
(c)(2)(i) of this section applied, or as if P acquired the T stock
surrendered by the T shareholders in the reorganization in a
transaction in which P's basis in the T stock was determined under
section 362(b). Accordingly, P may adjust its $5 basis by $60 (T's
net asset basis) or $85 (the T shareholders' aggregate basis
immediately before the reorganization in the T stock surrendered in
the reorganization).
(d) Allocable share. The facts are the same as in paragraph (a)
of this Example 2, except that X, a 10% shareholder of T, does not
exchange its stock for P stock. Thus, immediately after the reverse
triangular merger P owns less than all of the T stock. Under
paragraph (c)(2)(ii) of this section, P adjusts its basis in the T
stock only by the allocable portion of the basis adjustment
otherwise determined under paragraph (c)(2)(i) of this section.
Under paragraph (c)(2)(i) of this section, P would adjust its basis
in the T stock by $60. However, because X did not exchange its 10%
interest in T, P adjusts its basis in the T stock by 90% of $60, or
$54. Consequently, P has an adjustment of $54 in its T stock, and P
has a $164 basis in its T stock immediately after the
reorganization.
(e) Liabilities. The facts are the same as in paragraph (d) of
this Example 2, except that T's assets are subject to $50 of
liabilities. Under paragraph (c)(2)(i) of this section, P would
adjust its basis in the T stock by $10. However, P only acquired 90%
of the T stock and thus, it only adjusts its basis in the T stock by
90% of $10, or $9. Consequently, P has an adjustment of $9 in its T
stock, and P has a $119 basis in its T stock immediately after the
reorganization.
Example 3. Triangular B reorganization. (a) Facts. T has assets
with a fair market value of $100 and no liabilities. The T
shareholders have an aggregate basis in their T stock of $85
immediately before the reorganization. Pursuant to a plan, P forms S
with $5 cash and S acquires all of the T stock in exchange for $100
of P stock. The transaction is a reorganization to which section
368(a)(1)(B) applies.
(b) Basis adjustment. Under paragraph (c)(3) of this section,
P's basis in its S stock immediately after the reorganization is
adjusted by treating P as if it acquired the T stock acquired by S
in the reorganization directly from the T shareholders in exchange
for the P stock in a transaction in which P's basis in the T stock
was determined under section 362(b). Under section 362(b), P would
have an aggregate basis of $85 in the T stock received by S in the
reorganization. P is then treated as if it transferred the T stock
to S in a transaction in which P's basis in the S stock was
determined under section 358. Under section 358, P's basis in its S
stock would be increased by the $85 basis in the T stock deemed
transferred. Consequently, P has a $90 basis in its S stock
immediately after the reorganization.
(d) Special rule for consideration not provided by P--(1) In
general. The amount of P's adjustment to basis in its S or T stock, as
applicable, described in paragraph (c) of this section is decreased by
the fair market value of any consideration (including P stock in which
gain is recognized, see Sec. 1.1032-(2)(c)) that is exchanged in the
reorganization and that is not provided by P pursuant to the plan of
reorganization. This paragraph (d) does not apply to the amount of T
liabilities assumed by S or to which the T assets are subject under
paragraph (c)(1) of this section (or deemed assumed or taken subject to
by S under paragraph (c)(2)(i) and (ii) of this section).
(2) Limitation. P makes no adjustment to basis under this section
if the decrease required under paragraph (d)(1) of this section exceeds
the amount of the adjustment described in paragraph (c) of this
section.
(3) Example. The rules of this paragraph (d) are illustrated by the
following example. For purposes of this example, P, S, and T are
domestic corporations, P and S do not file consolidated returns, P owns
all of the only class of S stock, the P stock exchanged in the
transaction satisfies the requirements of the applicable triangular
reorganization provisions, and the facts set forth the only corporate
activity.
Example. (a) Facts. T has assets with an aggregate basis of $60
and fair market value of $100 and no liabilities. S is an operating
company with substantial assets that has been in existence for
several years. P has a $100 basis in its S stock. Pursuant to a
plan, T merges into S and the T shareholders receive $70 of P stock
provided by P pursuant to the plan and $30 of cash provided by S in
exchange for their T stock. The transaction is a reorganization to
which sections 368(a)(1)(A) and (a)(2)(D) apply.
(b) Basis adjustment. Under paragraph (c)(1) of this section,
P's $100 basis in its S stock is increased by the $60 basis in the T
assets deemed transferred. Under paragraph (d)(1) of this section,
the $60 adjustment is decreased by the $30 of cash provided by S in
the reorganization. Consequently, P has a net adjustment of $30 in
its S stock, and P has a $130 basis in its S stock immediately after
the reorganization.
(c) Appreciated asset. The facts are the same as in paragraph
(a) of this Example, except that in the reorganization S provides an
asset with a $20 adjusted basis and $30 fair market value instead of
$30 of cash. The basis results are the same as in paragraph (b) of
this Example. In addition, S recognizes $10 of gain under section
1001 on its disposition of the asset in the reorganization.
(d) Depreciated asset. The facts are the same as in paragraph
(c) of this Example, except that S has a $60 adjusted basis in the
asset. The basis results are the same as in paragraph (b) of this
Example. In addition, S recognizes $30 of loss under section 1001 on
its disposition of the asset in the reorganization.
(e) P stock. The facts are the same as in paragraph (a) of this
Example, except that in the reorganization S provides P stock with a
fair market value of $30 instead of $30 of cash. S acquired the P
stock in an unrelated transaction several years before the
reorganization. S has a $20 adjusted basis in the P stock. The basis
results are the same as in paragraph (b) of this Example. In
addition, S recognizes $10 of gain on its disposition of the P stock
in the reorganization. See Sec. 1.1032-2(c).
(e) Cross-reference. For rules relating to stock basis adjustments
made immediately after a triangular reorganization in which P and S, or
P and T, as applicable, are, or become, members of a consolidated
group, see Sec. 1.1502-30.
(f) Effective dates--(1) General rule. Except as otherwise provided
in this paragraph (f), this section applies to triangular
reorganizations occurring on or after December 23, 1994.
(2) Special rule for reverse triangular mergers. For a reverse
triangular merger occurring before December 23, 1994, P may--
(i) Determine the basis in its T stock as if paragraph (c)(2)(i) of
this section applied, or
(ii) Determine the basis in its T stock acquired as if P acquired
such stock from the former T shareholders in a transaction in which P's
basis in the T stock was determined under section 362(b).
Par. 3. Section 1.1032-2 is proposed to be added to read as
follows:
Sec. 1.1032-2 Disposition by a corporation of stock of a controlling
corporation in certain triangular reorganizations.
(a) Scope. This section provides rules for certain triangular
reorganizations described in Sec. 1.358-(6)(b) when the acquiring
corporation (S) acquires property or stock of another corporation (T)
in exchange for stock of the corporation (P) in control of S.
(b) General nonrecognition of gain or loss. For purposes of
Sec. 1.1032-1(a), in the case of a forward triangular merger, a
triangular C reorganization, or a triangular B reorganization (as
described in Sec. 1.358-6(b)), P stock provided by P to S, or directly
to T or T's shareholders on behalf of S, pursuant to the plan of
reorganization is treated as a disposition by P of shares of its own
stock for T's assets or stock, as applicable.
(c) Treatment of S. S must recognize gain or loss on its exchange
of P stock as consideration in a reorganization described in paragraph
(b) of this section if S did not receive the P stock from P pursuant to
the plan of reorganization. See Sec. 1.358-6(d) for the effect on P's
basis in its S or T stock, as applicable.
(d) Examples. The rules of this section are illustrated by the
following examples. For purposes of these examples, P, S, and T are
domestic corporations, P and S do not file consolidated returns, P owns
all of the only class of S stock, the P stock exchanged in the
transaction satisfies the requirements of the applicable reorganization
provisions, and the facts set forth the only corporate activity.
Example 1. Forward triangular merger solely for P stock. (a)
Facts. T has assets with an aggregate basis of $60 and fair market
value of $100 and no liabilities. Pursuant to a plan, P forms S by
transferring $100 of P stock to S and T merges into S. In the
merger, the T shareholders receive, in exchange for their T stock,
the P stock that P transferred to S. The transaction is a
reorganization to which sections 368(a)(1)(A) and (a)(2)(D) apply.
(b) No gain or loss recognized on the use of P stock. Under
paragraph (b) of this section, the P stock provided by P pursuant to
the plan of reorganization is treated for purposes of Sec. 1.1032-
(1)(a) as disposed of by P for the T assets acquired by S in the
merger. Consequently, neither P nor S has taxable gain or deductible
loss on the exchange.
Example 2. Forward triangular merger solely for P stock provided
in part by S. (a) Facts. T has assets with an aggregate basis of $60
and fair market value of $100 and no liabilities. S is an operating
company with substantial assets that has been in existence for
several years. S also owns P stock with a $20 adjusted basis and $30
fair market value. S acquired the P stock in an unrelated
transaction several years before the reorganization. Pursuant to a
plan, P transfers additional P stock worth $70 to S and T merges
into S. In the merger, the T shareholders receive $100 of P stock
($70 of P stock provided by P and $30 of P stock provided by S). The
transaction is a reorganization to which sections 368(a)(1)(A) and
(a)(2)(D) apply.
(b) Gain or loss recognized by S on the use of its P stock.
Under paragraph (b) of this section, the $70 of P stock provided by
P pursuant to the plan of reorganization is treated as disposed of
by P for the T assets acquired by S in the merger. Consequently,
neither P nor S has taxable gain or deductible loss on the exchange
of those shares. Under paragraph (c) of this section, however, S
recognizes $10 of gain on the exchange of its P stock in the
reorganization because S did not receive the P stock from P pursuant
to the plan of reorganization. See Sec. 1.358-6(d) for the effect on
P's basis in its S or T stock, as applicable.
(e) Effective date. This section applies to triangular
reorganizations occurring on or after December 23, 1994.
Par. 4. Section 1.1502-30 is proposed to be added under the heading
``Basis, stock ownership, and earnings and profits rules'' to read as
follows:
Sec. 1.1502-30 Stock basis after certain triangular reorganizations.
(a) Scope. This section provides rules for adjusting the basis in
the stock of an acquiring corporation immediately after a triangular
reorganization. The definitions and nomenclature contained in
Sec. 1.358-6 apply to this section.
(b) General rules--(1) Forward triangular merger, triangular C
reorganization, or triangular B reorganization. P adjusts its basis in
the stock of S immediately after a forward triangular merger,
triangular C reorganization, or triangular B reorganization under
Secs. 1.358-6(c) and 1.358-6(d), except that Secs. 1.358-6 (c)(1)(ii)
and (d)(2) do not apply. Instead, P adjusts such basis by taking into
account the full amount of--
(i) T liabilities assumed by S or the amount of liabilities to
which the T assets are subject, and
(ii) the fair market value of any consideration not provided by P
pursuant to the plan of reorganization.
(2) Reverse triangular merger. If P adjusts its basis in the T
stock acquired immediately after a reverse triangular merger under
Secs. 1.358-6(c)(2) and 1.358-6(d), Secs. 1.358-6 (c)(1)(ii) and (d)(2)
do not apply. Instead, P adjusts such basis by taking into account the
full amount of--
(i) T liabilities deemed assumed by S or the amount of liabilities
to which the T assets are subject, and
(ii) the fair market value of any consideration not provided by P
pursuant to the plan of reorganization.
(3) Excess loss accounts. Negative adjustments under this section
may exceed P's basis in its S or T stock. The resulting negative amount
is P's excess loss account in its S or T stock. See Sec. 1.1502-19 for
rules treating excess loss accounts as negative basis, and treating
references to stock basis as including references to excess loss
accounts.
(4) Application of other rules of law. The rules for this section
are in addition to other rules of law. See Sec. 1.1502-80(d) for the
non-application of section 357(c) to P.
(5) Examples. The rules of this paragraph (b) are illustrated by
the following examples. For purposes of these examples, P, S, and T are
domestic corporations, P and S file consolidated returns, P owns all of
the only class of S stock, the P stock exchanged in the transaction
satisfies the requirements of the applicable triangular reorganization
provisions, and the facts set forth the only corporate activity.
Example 1. Liabilities. (a) Facts. T has assets with an
aggregate basis of $60 and fair market value of $100. T's assets are
subject to $70 of liabilities. Pursuant to a plan, P forms S with $5
of cash (which S retains), and T merges into S. In the merger, the T
shareholders receive P stock worth $30 in exchange for their T
stock. The transaction is a reorganization to which sections 368
(a)(1)(A) and (a)(2)(D) apply.
(b) Basis adjustment. Under Sec. 1.358-6, P adjusts its basis in
the S stock as if P had acquired the T assets with a carryover basis
under section 362 and transferred these assets to S in a transaction
in which P determines its basis in the S stock under section 358.
Under the rules of this section, the limitation described in
Sec. 1.358-6(c)(1)(ii) does not apply. Thus, P adjusts its basis in
the S stock by -$10 (the aggregate adjusted basis of T's assets
decreased by the amount of liabilities to which the T assets are
subject). Consequently, immediately after the reorganization, P has
an excess loss account of $5 in its S stock.
Example 2. Consideration not provided by P. (a) Facts. T has
assets with an aggregate basis of $10 and fair market value of $100
and no liabilities. S is an operating company with substantial
assets that has been in existence for several years. P has a $5
basis in its S stock. Pursuant to a plan, T merges into S and the T
shareholders receive $70 of P stock provided by P pursuant to the
plan of reorganization and $30 of cash provided by S in exchange for
their T stock. The transaction is a reorganization to which sections
368 (a)(1)(A) and (a)(2)(D) apply.
(b) Basis adjustment. Under Sec. 1.358-6, P adjusts its basis in
the S stock as if P had acquired the T assets with a carryover basis
under section 362 and transferred these assets to S in a transaction
in which P determines its basis in the S stock under section 358.
Under the rules of this section, the limitation described in
Sec. 1.358-6(d)(2) does not apply. Thus, P adjusts its basis in the
S stock by -$20 (the aggregate adjusted basis of T's assets
decreased by the fair market value of the consideration provided by
S). Consequently, immediately after the reorganization, P has an
excess loss account of $15 in its S stock.
(c) Appreciated asset. The facts are the same as in paragraph
(a) of this Example 2, except that in the reorganization S provides
an asset with a $20 adjusted basis and $30 fair market value instead
of $30 cash. The basis is adjusted in the same manner as in
paragraph (b) of this Example 2. In addition, because S recognizes a
$10 gain from the asset under section 1001, P's basis in its S stock
is increased under Sec. 1.1502-32(b) by S's $10 gain. Consequently,
immediately after the reorganization, P has an excess loss account
of $5 in its S stock. (The results would be the same if the
appreciated asset provided by S was P stock in which S recognized
gain. See Sec. 1.1032-2(c)).
Example 3. Reverse triangular merger. (a) Facts. T has assets
with an aggregate basis of $60 and fair market value of $100. T's
assets are subject to $70 of liabilities. S is an operating company
with substantial assets that has been in existence for several
years. P owns all of the only class of S stock. P has a $5 basis in
its S stock. Pursuant to a plan, S merges into T with T surviving.
In the merger, the T shareholders receive P stock provided by P
pursuant to the plan worth $30 in exchange for their T stock. The
transaction is a reorganization to which sections 368 (a)(1)(A) and
(a)(2)(E) apply. Because S is a previously existing operating
company with substantial assets, the transaction does not qualify as
a reorganization under section 368(a)(1)(B).
(b) Basis adjustment. Under Sec. 1.358-6, P adjusts its basis in
the S stock as if T had merged into S in a forward triangular merger
with S surviving. Thus, P adjusts its basis in the S stock as if P
had acquired the T assets with a carryover basis under section 362
and transferred these assets to S in a transaction in which P
determines its basis in the S stock under section 358. Under the
rules of this section, the limitation described in Sec. 1.358-
6(c)(1)(ii) does not apply. Thus, P adjusts its basis in the T stock
by -$10 (the aggregate adjusted basis of T's assets decreased by the
amount of liabilities to which the T assets are subject).
Consequently, immediately after the reorganization, P has an excess
loss account of $5 in its T stock.
(c) Effective date. This section applies to reorganizations
occurring on or after [INSERT THE DAY THE FINAL REGULATIONS ARE
PUBLISHED IN THE FEDERAL IN THE FEDERAL REGISTER].
Margaret Milner Richardson,
Commissioner of Internal Revenue.
[FR Doc. 94-31287 Filed 12-22-94; 8:45 am]
BILLING CODE 4830-01-U