[Federal Register Volume 60, Number 245 (Thursday, December 21, 1995)]
[Rules and Regulations]
[Pages 66077-66082]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 95-30875]
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DEPARTMENT OF THE TREASURY
Internal Revenue Service
26 CFR Part 1
[TD 8648]
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: Final regulations.
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SUMMARY: This document contains final regulations under sections 358,
1032, and 1502 of the Internal Revenue Code of 1986. The final
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. They 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.
DATES: These regulations are effective December 21, 1995.
For dates of applicability, see the ``Effective Dates'' section
under the SUPPLEMENTARY INFORMATION portion of the preamble and the
effective date provisions of the new or revised regulations.
FOR FURTHER INFORMATION CONTACT: Curt Cutting, (202) 622-7550 (not a
toll-free number).
SUPPLEMENTARY INFORMATION:
Background
This document contains final regulations under sections 358, 1032,
and 1502. The proposed regulations were published in the Federal
Register on December 23, 1994 (59 FR 66280 [CO-993-71], 1995-4 I.R.B.
59 (January 23, 1995)). The IRS received many comments on the proposed
regulations and held a public hearing on March 31, 1995.
After consideration of the comments and the statements made at the
hearing, the proposed regulations are adopted as revised by this
Treasury decision.
[[Page 66078]]
Overview
The final regulations adopt the over-the-top model contained in the
proposed regulations. Subject to certain modifications, the model
generally adjusts a controlling corporation's (P's) basis in the stock
of its controlled corporation (S or T) as a result of certain
triangular reorganizations as if P had 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 had transferred the T
assets (and liabilities) to S in a transaction in which P's basis in
the S or T stock was adjusted under section 358. The preamble to the
proposed regulations contains a discussion of the justification for the
model. See 59 FR 66280-81.
The final regulations also provide a special rule that treats S's
use of P's stock provided by P pursuant to the plan of reorganization
as a disposition of those shares by P.
The final regulations apply only for the purpose of determining P's
basis in its S or T stock following a transaction that otherwise
qualifies as a reorganization within the meaning of section 368. They
do not address issues concerning the qualification of a transaction as
a reorganization.
With the publication of these final regulations, the IRS announces
the closing of its study project referred to in Sec. 5.14 of Rev. Proc.
95-3, 1995-1 C.B. 385, 395.
The significant comments on the proposed regulations and revisions
made are discussed below.
Summary of Comments and Explanation of Revisions P's Basis in T
Stock Owned Before a Reverse Triangular Merger
The proposed regulations adjusted basis as a result of a reverse
triangular merger to reflect the amount of T stock received in the
transaction. Comments on the proposed regulations questioned how an
adjustment based on the amount of T stock received in the transaction
would apply in the case in which P owns T stock before the transaction.
In response to these comments, the final regulations allow P to
treat its T stock as acquired in the transaction or not, without regard
to the form of the transaction. Thus, P may retain its basis in the T
stock owned before the transaction, or may determine its basis in that
stock as an allocable portion of T's net asset basis. The regulations
require no explicit election. Instead, it is assumed P will pick the
higher basis. This rule applies only for determining basis, and not for
qualifying the transaction as a reverse triangular merger. See Rev.
Rul. 74-564, 1974-2 C.B. 124.
The Treasury and the IRS continue to study issues relating to
restructurings involving related parties and cross-ownership, and
welcome comments and suggestions on these issues.
Net Negative Adjustment
Under the proposed regulations, P's basis adjustment was reduced by
the fair market value of consideration not provided by P, and by the
amount of liabilities assumed by S or to which T assets are subject.
These reductions did not result in a net negative basis adjustment to
P's basis in its S stock before the transaction. This limitation did
not apply, however, where P and S, or P and T, as applicable, were
members of a consolidated group following the triangular
reorganization. In the consolidated context, the negative adjustments
could result in a net negative adjustment to P's basis in its S stock
before the transaction, even if the adjustment resulted in an excess
loss account under Sec. 1.1502-19.
Some comments on the proposed regulations argued against reducing
P's basis in its S stock before the transaction by a net negative
adjustment in the consolidated context. Other comments, however, agreed
that it is appropriate not to limit the net negative adjustment in this
context.
The Treasury and the IRS continue to believe that the proposed
regulations reach the correct result. Therefore, the final regulations
adopt the rules as proposed.
Overlap of Reverse Triangular Merger and Other Transactions
The proposed regulations provided that if a transaction qualified
as both a reverse triangular merger and a stock acquisition under
section 368(a)(1)(B), P adjusted its basis in its T stock based either
on T's net asset basis 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)).
One comment noted that a reverse triangular merger might overlap
with a section 351 transfer and therefore requested that this rule also
apply to such a case. The final regulations adopt this suggestion.
Manner of Making Elections
The proposed and final regulations provide P with elections for its
basis adjustments when P owns stock of T and when a reverse triangular
merger also qualifies as a section 351 transaction or B reorganization.
In these situations, P does not have to declare how it will compute its
basis. Rather, P must simply retain appropriate records. See
Sec. 1.368-3.
Application of Section 1032
The proposed regulations under section 1032 generally provided that
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 would be treated as
a disposition by P of shares of its own stock for T assets or stock, as
applicable. Thus, no gain or loss was recognized on the use of such P
stock in the transaction. S, however, recognized gain or loss on its
use of P stock if S did not receive the stock from P as part of the
plan of reorganization. This rule did not apply in the case of a
reverse triangular merger; section 361 provides nonrecognition
treatment for S's use of P stock in such a case. To clarify this
treatment, a cross-reference has been added to the final regulations.
Comments to the proposed regulations requested that they be
expanded to cover P debt, warrants and options provided by P to S, or
directly to T or T's shareholders on behalf of S, pursuant to the plan
of reorganization. Comments also requested that the rule be extended to
taxable transactions.
The issues raised in these comments are beyond the scope of this
project. However, the Treasury and the IRS are studying issues relating
to the scope of section 1032 and welcome comments and suggestions.
Special Analyses
It has been determined that this Treasury decision is not a
significant regulatory action as defined in EO 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,
the notice of proposed rulemaking preceding these regulations was
submitted to the Small Business Administration for comment on its
impact on small business.
Effective Dates
Generally, Sec. 1.358-6 applies with respect to all triangular
reorganizations occurring on or after December 23, 1994, the day that
the proposed regulations were published in the Federal Register.
As stated in the preamble to the proposed regulations, any
adjustment to
[[Page 66079]]
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.
However, 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).
Section 1.1032-2 applies 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.
Section 1.1502-30 applies with respect to triangular
reorganizations occurring on or after December 21, 1995, in which P and
S, or P and T, as applicable, are members of a consolidated group
following the triangular reorganization. For similar triangular
reorganizations occurring before December 21, 1995, any adjustments to
P's basis in its S or T stock (as applicable) must be consistent with
the rules applicable for nonconsolidated taxpayers, except to the
extent that Sec. 1.1502-31 applies to a transaction that is a group
structure change.
Drafting Information
The principal authors of these regulations are Rose Williams and
Curt Cutting, Office of Assistant Chief Counsel (Corporate). However,
other personnel from the IRS and the Treasury Department participated
in their development.
List of Subjects for 26 CFR Part 1
Income taxes, Reporting and recordkeeping requirements.
Adoption of Amendments to the Regulations
Accordingly, 26 CFR part 1 is 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 * * *
Sec. 1.358-2 [Amended]
Par. 2. Section 1.358-2(d) is removed.
Par. 3. Section 1.358-6 is 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 Internal Revenue 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)) 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.
(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, as a result of a triangular reorganization, is adjusted
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
acquired by S 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 which S assumed or
to which the T assets acquired by S 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 acquired by S are
subject equals or 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--(A) Treated as a
forward triangular merger. Except as otherwise provided in this
paragraph (c)(2), P's basis in its T stock acquired in a reverse
triangular merger equals its basis in its S stock immediately before
the transaction adjusted as if T had merged into S in a forward
triangular merger to which paragraph (c)(1) of this section applies.
(B) Allocable share. If P acquires less than all of the T stock in
the transaction, the basis adjustment described in paragraph
(c)(2)(i)(A) of this section is reduced in proportion to the percentage
of T stock not acquired in the transaction. The percentage of T stock
not acquired in the transaction is determined by taking into account
the fair market value of all classes of T stock.
(C) Special rule if P owns T stock before the transaction. Solely
for purposes of paragraphs (c)(2)(i)(A) and (B) of this section, if P
owns T stock before the transaction, P may treat that stock as acquired
in the transaction or not, without regard to the form of the
transaction.
(ii) Reverse triangular merger that qualifies as a section 351
transfer or section 368(a)(1)(B) reorganization. Notwithstanding
paragraph (c)(2)(i) of this section, if a reorganization qualifies as
both a reverse triangular merger and
[[Page 66080]]
as a section 351 transfer or as both a reverse triangular merger and a
reorganization under section 368(a)(1)(B), P can--
(A) Determine the basis in its T stock as if paragraph (c)(2)(i) of
this section applies; or
(B) Determine the basis in the 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).
(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 Sec. 1.358-6(c)(1), P's $5 basis in
its S stock is adjusted as if P 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 $5 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 as a result of 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 Sec. 1.358-6(c)(1), P's $110
basis in its S stock is increased by the $60 basis in the T assets
deemed transferred. Consequently, P has a $170 basis in its S stock
as a result of 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 $5 basis in
its S stock is increased by the $60 basis in the T assets deemed
transferred. Consequently, P has a $65 basis in its S stock as a
result of the reorganization.
(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 is increased by
the $60 basis in the T assets deemed transferred and decreased by
the $50 of liabilities to which the T assets acquired by S are
subject. Consequently, P has a net basis adjustment of $10, and a
$15 basis in its S stock as a result of 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
Sec. 1.358-6(c)(1)(ii), the adjustment under Sec. 1.358-6(c) is zero
if the amount of the liabilities which S assumed or to which the T
assets acquired by S 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 as a result of 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. 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 $10 cash from P and P stock worth $90 in
exchange for their T stock. The transaction is a reorganization to
which sections 368(a)(1)(A) and (a)(2)(E) apply.
(b) Basis adjustment. Under Sec. 1.358-6(c)(2)(i)(A), P's basis
in the T stock acquired is P's $110 basis in its S stock before the
transaction, adjusted as if T had merged into S in a forward
triangular merger to which Sec. 1.358-6(c)(1) applies. In such a
case, P's $110 basis in its S stock before the transaction 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 transaction.
(c) Reverse triangular merger that also qualifies under section
368(a)(1)(B). The facts relating to T are the same as in paragraph
(a) of this Example 2. P, however, forms S pursuant to the plan of
reorganization. The T shareholders receive $100 worth of P stock
(and no cash) in exchange for their T stock. 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 Sec. 1.358-6(c)(2)(ii), P may determine its basis in its T
stock either as if Sec. 1.358-6(c)(2)(i) applied to the T stock
acquired, or as if P acquired the T stock from the former T
shareholders in a transaction in which P's basis in the T stock was
determined under section 362(b). Accordingly, P may determine a
basis in its T stock of $60 (T's net asset basis) or $85 (the T
shareholders' aggregate basis in the T stock immediately before the
reorganization).
(d) Allocable share in a reverse triangular merger. The facts
are the same as in paragraph (a) of this Example 2, except that X, a
10% shareholder of T, does not participate in the transaction. The
remaining T shareholders receive $10 cash from P and P stock worth
$80 for their T stock. P owns 90% of the T stock after the
transaction. Under 1.358-6(c)(2)(i)(A), P's basis in its T stock is
P's $110 basis in its S stock before the reorganization, adjusted as
if T had merged into S in a forward triangular merger. In such a
case, P's basis would have been adjusted by the $60 basis in the T
assets deemed transferred. Under Sec. 1.358-6(c)(2)(i)(B), however,
the basis adjustment determined under Sec. 1.358-6(c)(2)(i)(A) is
reduced in proportion to the percentage of T stock not acquired by P
in the transaction. The percentage of T stock not acquired in the
transaction is 10%. Therefore, P reduces its $60 basis adjustment by
10%, resulting in a net basis adjustment of $54. Consequently, P has
a $164 basis in its T stock as a result of the transaction.
(e) P's ownership of T stock. The facts are the same as in
paragraph (a) of this Example 2, except that P owns 10% of the T
stock before the transaction. P's basis in that T stock is $8. All
the T shareholders other than P surrender their T stock for $10 cash
from P and P stock worth $80. P does not surrender the stock in the
transaction. Under Sec. 1.358-6(c)(2)(i)(C), P may treat its T stock
owned before the transaction as acquired in the transaction or not.
If P treats that T stock as acquired in the transaction, P's basis
in that T stock and the T stock actually acquired in the transaction
equals P's $110 basis in its S stock before the transaction,
adjusted by the $60 basis of the T assets deemed transferred, for a
total basis of $170. If P treats its T stock as not acquired, P
retains its $8 pre-transaction basis in that stock. P's basis in its
other T shares equals P's $110 basis in its S stock before the
transaction, adjusted by $54 (the $60 basis in the T assets deemed
transferred, reduced by 10%), for a total basis of $164 in those
shares. See Sec. 1.358-6(c)(2)(i)(A) and (B). Consequently, if P
treats its T shares as not acquired, P's total basis in all of its T
shares is $172.
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 Sec. 1.358-6(c)(3), P adjusts its $5
basis in its S stock 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
[[Page 66081]]
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 as a result of 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 or loss 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 acquired by S are
subject under paragraph (c)(1) of this section (or deemed assumed or
taken subject to by S under paragraph (c)(2)(i) 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 equals
or 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 Sec. 1.358-6(c)(1), P's $100 basis
in its S stock is increased by the $60 basis in the T assets deemed
transferred. Under Sec. 1.358-6(d)(1), 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 as a result of 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 as a result of 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. For rules relating to stock basis adjustments after
a group structure change, see Sec. 1.1502-31.
(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. 4. Section 1.1032-2 is 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. For rules governing the
use of P stock in a reverse triangular merger, see section 361.
(c) Treatment of S. S must recognize gain or loss on its exchange
of P stock as consideration in a forward triangular merger, a
triangular C reorganization, or a triangular B reorganization (as
described in Sec. 1.358-6(b)), 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. For rules
governing S's use of P stock in a reverse triangular merger, see
section 361.
(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 to S as part of the plan and $30 of P
stock held by S previously). 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
[[Page 66082]]
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 stock.
(e) Effective date. This section applies to triangular
reorganizations occurring on or after December 23, 1994.
Par. 5. Section 1.1502-30 is added to read as follows:
Sec. 1.1502-30 Stock basis after certain triangular reorganizations.
(a) Scope. This section provides rules for determining the basis of
the stock of an acquiring corporation as a result of 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 as a result of a forward triangular merger, triangular C
reorganization, or triangular B reorganization under Sec. 1.358-6(c)
and (d), except that Sec. 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 acquired by S 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 as a result of a reverse triangular merger under
Sec. 1.358-6 (c)(2)(i) and (d), Sec. 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 deemed acquired by S 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, the facts set forth the only corporate activity, and tax
liabilities are disregarded.
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 $5 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, as a result of 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 $5 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). As a result of 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,
as a result of 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 with respect to 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. 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 exchange their T stock for $2 cash from P and $28 worth
of P stock provided by P pursuant to the plan. The transaction is a
reorganization to which sections 368 (a)(1)(A) and (a)(2)(E) apply.
(b) Basis adjustment. Under Sec. 1.358-6, P's basis in the T
stock acquired equals its $5 basis in its S stock immediately before
the transaction adjusted by the $60 basis in the T assets deemed
transferred, and the $70 of liabilities to which the T assets are
subject. Under the rules of this section, the limitation described
in Sec. 1.358-6(c)(1)(ii) does not apply. Consequently, P has an
excess loss account of $5 in its T stock as a result of the
transaction.
(c) Effective date. This section applies to reorganizations
occurring on or after December 21, 1995.
Margaret Milner Richardson,
Commissioner of Internal Revenue.
Approved: December 12, 1995.
Leslie Samuels,
Assistant Secretary of the Treasury.
[FR Doc. 95-30875 Filed 12-20-95; 8:45 am]
BILLING CODE 4830-01-U