[Federal Register Volume 76, Number 224 (Monday, November 21, 2011)]
[Rules and Regulations]
[Pages 71878-71880]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2011-29799]



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DEPARTMENT OF THE TREASURY

Internal Revenue Service

26 CFR Part 1

[TD 9558]
RIN 1545-BJ21


Corporate Reorganizations; Allocation of Basis in ``All Cash D'' 
Reorganizations

AGENCY: Internal Revenue Service (IRS), Treasury.

ACTION: Final and temporary regulations.

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SUMMARY: This document contains temporary regulations regarding the 
determination of the basis of stock or securities in a reorganization 
where no stock or securities of the issuing corporation is issued and 
distributed in the transaction. These temporary regulations clarify 
that, in certain reorganizations where no stock or securities of the 
issuing corporation is issued and distributed in the transaction, the 
ability to designate the share of stock of the issuing corporation to 
which the basis, if any, of the stock or securities surrendered will 
attach applies only to a shareholder that owns actual shares in the 
issuing corporation. These temporary regulations affect corporations 
engaging in such transactions and their shareholders. The text of the 
temporary regulations also serves as the text of the proposed 
regulations set forth in the notice of proposed rulemaking on this 
subject in the Proposed Rules section in this issue of the Federal 
Register.

DATES: Effective Date: These regulations are effective on November 21, 
2011.
    Applicability Date: For dates of applicability, see Sec.  1.358-
2T(d).

FOR FURTHER INFORMATION CONTACT: Lisa A. Fuller at (202) 622-7550 (not 
a toll-free number).

SUPPLEMENTARY INFORMATION: 

Background

    On December 19, 2006, the IRS and the Treasury Department published 
a notice of proposed rulemaking (REG-125632-06) in the Federal Register 
(71 FR 75898) that included regulations under section 368 (the 
Temporary Regulations). These regulations provided guidance regarding 
whether the distribution requirement under sections 368(a)(1)(D) and 
354(b)(1)(B) is satisfied if there is no actual distribution of stock 
or securities. On December 18, 2009, the IRS and the Treasury 
Department published final regulations (TD 9475) in the Federal 
Register (71 FR 75879) that, in addition to providing guidance 
regarding the qualification of certain transactions as reorganizations 
described in section 368(a)(1)(D), amended the regulations under Sec.  
1.358-2(a)(2)(iii) to provide that in the case of a reorganization in 
which the property received consists solely of non-qualifying property 
equal to the value of the assets transferred (as well as a nominal 
share described in the final regulations), the shareholder or security 
holder may designate the share of stock of the issuing corporation to 
which the basis, if any, of the stock or securities surrendered will 
attach. The IRS and the Treasury Department issued these regulations in 
response to comments that, in a transaction where the consideration 
received consists solely of cash and a nominal share, the mechanics of 
preserving basis, if any, in the shares of the stock or securities 
surrendered in the basis of the stock of the issuing corporation were 
unclear under current law.
    The IRS and the Treasury Department have become aware that some 
maintain these rules, as written, could be interpreted to allow an 
inappropriate allocation of basis by persons that do not own actual 
shares of stock in the issuing corporation. This interpretation would 
most likely be asserted in the context of a lower-tier reorganization 
transaction involving corporations in two different ownership chains 
that have the same ultimate indirect shareholder(s). Specifically, the 
argument is that the rules could be interpreted to allow persons who do 
not own actual shares of stock of the issuing corporation to allocate 
the adjusted basis of the nominal share to an actual share of stock of 
the issuing corporation directly owned by someone else before the 
nominal share is deemed to be further transferred through the chains of 
ownership to reflect the actual ownership of the target and issuing 
corporations. Under this interpretation of the rules, the actual share 
to which the basis was allocated could then be sold to recognize a 
loss, and taxpayers would avoid losing the nominal share's basis, which 
would otherwise be zero following its deemed transfer through the 
chains of ownership to the actual shareholder of the issuing 
corporation.
    For example, assume that J owns all the stock of corporations X and 
Y, and X owns all of the stock of corporation T. X has a $150 basis in 
the T stock. The corporations do not join in the filing of a 
consolidated return. T sells all of its assets to Y for $100 cash, 
their fair market value, and liquidates. Pursuant to Sec.  1.368-2(l), 
Y will be deemed to issue a nominal share of Y stock to T in addition 
to the $100 actually exchanged for the T assets, and T will be deemed 
to distribute the nominal share of Y stock to X. X will have a basis of 
$50 in the nominal share of Y stock under section 358(a). Pursuant to 
Sec.  1.368-2(l), the nominal share of Y stock is deemed to be further 
transferred to J in order to reflect the actual ownership of Y. J's 
basis in the nominal share of Y stock would be zero under section 
301(d). However, some argue that the rule, as currently written, could 
be interpreted as allowing X to allocate the $50 of basis in the 
nominal share to an actual share of Y stock owned by J prior to the 
nominal share of Y stock being deemed to be further distributed to J.
    The IRS and the Treasury Department did not intend for the final 
regulations to allow such an inappropriate allocation of basis and do 
not believe the current regulations support such an allocation. 
Accordingly, the IRS and the Treasury Department are proposing rules in 
the Proposed Rules section in this issue of the Federal Register, to 
clarify that, in certain reorganizations where no stock or securities 
of the issuing corporation is issued and distributed in the 
transaction, the ability to designate the share of stock of the issuing 
corporation to which the basis, if any, of the stock or securities 
surrendered will attach applies only to a shareholder that owns actual 
shares in the issuing corporation.

Explanation of Provisions

    The preamble to the final regulation noted that the IRS and the 
Treasury Department believe the ability to designate any remaining 
basis is consistent with current law regarding basis determination, as 
a similar result would occur under Sec.  1.358-2 if an amount of 
issuing corporation stock was actually issued in the transaction (74 FR 
67053; 74 FR 67056; TD 9475). To complete the analogy, however, in the 
case where stock is actually issued in a lower-tier transfer, such 
stock would then be transferred through chains of ownership, and in the 
process, if basis in the stock exceeded value, the basis in the shares 
would be reduced to the fair market value of the shares in the hands of 
the distributee, under section 301(d). Accordingly, in such a case, 
basis in excess of the value of the issuing corporation shares would 
generally be preserved only where the shareholder of the transferor 
corporation does not further distribute the stock of the issuing 
corporation in a transaction to which section 301 applies.
    Consistent with this view, these temporary regulations clarify and 
amend the final regulations (TD 9475)

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under Sec.  1.358-2(a)(2)(iii) by providing that if an actual 
shareholder of the issuing corporation is deemed to receive a nominal 
share of stock of the issuing corporation described in Sec.  1.368-
2(l), such shareholder must, after allocating and adjusting the basis 
of the nominal share in accordance with the rules of this section and 
Sec.  1.358-1, and after adjusting the basis in the nominal share for 
any transfers described in Sec.  1.358-1, designate the share of stock 
of the issuing corporation to which the basis, if any, of the nominal 
share will attach.
    The IRS and the Treasury Department also are clarifying the 
effective date for a 2009 amendment to the regulations under Sec.  
1.358-2(a)(iii).

Special Analyses

    It has been determined that this Treasury decision is not a 
significant regulatory action as defined in Executive Order 12866, as 
supplemented by Executive Order 13563. Therefore, a regulatory 
assessment is not required. It also has been determined that section 
553(b) of the Administrative Procedure Act (5 U.S.C. chapter 5) does 
not apply to these regulations. For the applicability of the Regulatory 
Flexibility Act, please refer to the cross-reference notice of proposed 
rulemaking published elsewhere in this Federal Register. Pursuant to 
section 7805(f) of the Internal Revenue Code, these regulations were 
submitted to the Chief Counsel for Advocacy of the Small Business 
Administration for comment on their impact on small business.

Drafting Information

    The principal author of these regulations is Lisa A. Fuller of the 
Office of the Associate Chief Counsel (Corporate). However, other 
personnel from the IRS and the Treasury Department participated in 
their development.

List of Subjects in 26 CFR Part 1

    Income taxes, Reporting and recordkeeping requirements.

Amendments to the Regulations

    Accordingly, 26 CFR part 1 is amended as follows:

PART 1--INCOME TAXES

0
Paragraph 1. The authority citation for part 1 is amended by adding an 
entry in numerical order to read in part as follows:

    Authority:  26 U.S.C. 7805 * * *
    Section 1.358-2 also issued under 26 U.S.C. 358(b)(1).


0
Par. 2. Section 1.358-2 is amended by:
0
1. Revising paragraph (a)(2)(iii).
0
2. Revising paragraph (d).
    The revisions read as follows:

Sec.  1.358-2  Allocation of basis among nonrecognition property.

    (a) * * *
    (2) * * *
    (iii) [Reserved]. For further guidance, see Sec.  1.358-
2T(a)(2)(iii).
* * * * *
    (d) Effective/applicability date. This section generally applies to 
exchanges and distributions of stock and securities occurring on or 
after January 23, 2006. However, paragraph (a)(2)(iii) of this section 
applies to exchanges and distributions of stock and securities 
occurring on or after November 21, 2011. See Sec.  1.358-2(a)(2)(iii), 
as contained in 26 CFR part 1 revised as of April 1, 2010, for 
exchanges and distributions of stock and securities occurring on or 
after January 23, 2006, and before November 21, 2011.

0
Par. 3. Section 1.358-2T is added to read as follows:


Sec.  1.358-2T  Allocation of basis among nonrecognition property 
(temporary).

    (a)(1) through (a)(2)(ii) [Reserved]. For further guidance, see 
Sec.  1.358-2(a)(1) through (a)(2)(ii).
    (iii) For purposes of this section, if a shareholder or security 
holder surrenders a share of stock or a security in a transaction under 
the terms of section 354 (or so much of section 356 as relates to 
section 354) in which such shareholder or security holder receives no 
property or property (including property permitted by section 354 to be 
received without the recognition of gain or ``other property'' or 
money) with a fair market value less than that of the stock or 
securities surrendered in the transaction, such shareholder or security 
holder shall be treated as follows.
    (A) First, the shareholder or security holder shall be treated as 
receiving the stock, securities, other property, and money actually 
received by the shareholder or security holder in the transaction and 
an amount of stock of the issuing corporation (as defined in Sec.  
1.368-1(b)) that has a value equal to the excess of the value of the 
stock or securities the shareholder or security holder surrendered in 
the transaction over the value of the stock, securities, other 
property, and money the shareholder or security holder actually 
received in the transaction. If the shareholder owns only one class of 
stock of the issuing corporation the receipt of which would be 
consistent with the economic rights associated with each class of stock 
of the issuing corporation, the stock deemed received by the 
shareholder pursuant to the previous sentence shall be stock of such 
class. If the shareholder owns multiple classes of stock of the issuing 
corporation the receipt of which would be consistent with the economic 
rights associated with each class of stock of the issuing corporation, 
the stock deemed received by the shareholder shall be stock of each 
such class owned by the shareholder immediately prior to the 
transaction, in proportion to the value of the stock of each such class 
owned by the shareholder immediately prior to the transaction. The 
basis of each share of stock or security deemed received and actually 
received shall be determined under the rules of this section.
    (B) Second, the shareholder or security holder shall then be 
treated as surrendering all of its shares of stock and securities in 
the issuing corporation, including those shares of stock or securities 
held immediately prior to the transaction, those shares of stock or 
securities actually received in the transaction, and those shares of 
stock deemed received pursuant to the previous sentence, in a 
reorganization under section 368(a)(1)(E) in exchange for the shares of 
stock and securities of the issuing corporation that the shareholder or 
security holder actually holds immediately after the transaction. The 
basis of each share of stock and security deemed received in the 
reorganization under section 368(a)(1)(E) shall be determined under the 
rules of this section.
    (C) If an actual shareholder of the issuing corporation is deemed 
to receive a nominal share of stock of the issuing corporation 
described in Sec.  1.368-2(l), such shareholder must, after allocating 
and adjusting the basis of the nominal share in accordance with the 
rules of this section and Sec.  1.358-1, and after adjusting the basis 
in the nominal share for any transfers described in Sec.  1.368-2(l), 
designate the share of stock of the issuing corporation to which the 
basis, if any, of the nominal share will attach.
    (a)(2)(iv) through (c), Example 14 [Reserved]. For further 
guidance, see Sec.  1.358-2(a)(2)(iv) through (c), Example 14.

    Example 15.  (i) Facts. Each of Corporation X and Corporation Y 
has a single class of stock outstanding, all of which is owned by J, 
an individual. J acquired 100 shares of Corporation X stock on Date 
1 for $1.50 each. On Date 2, Corporation Y acquires the assets of 
Corporation X for $100 of cash, their fair market value, in a 
transaction described in Sec.  1.368-2(l). Pursuant to the terms of 
the exchange, Corporation X does not receive any Corporation Y 
stock. Corporation X

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distributes the $100 of cash to J in liquidation. Pursuant to Sec.  
1.368-2(l), Corporation Y will be deemed to issue a nominal share of 
Corporation Y stock to Corporation X in addition to the $100 of cash 
actually exchanged for the Corporation X assets, and Corporation X 
will be deemed to distribute all of the consideration to J. J will 
have a basis of $50 in the nominal share of Corporation Y stock 
under section 358(a).
    (ii) Analysis. Under paragraph (a)(2)(iii) of this section, J is 
the actual shareholder of Corporation Y, the issuing corporation, 
deemed to receive the nominal share of Corporation Y stock described 
in Sec.  1.368-2(l). Therefore, J must designate any share of 
Corporation Y stock to which the basis of $50 in the nominal share 
of Corporation Y stock will attach.
    Example 16.  (i) Facts. Each of Corporation X and Corporation Y 
has a single class of stock outstanding, all of which is owned by 
Corporation P. Corporation T has a single class of stock 
outstanding, all of which is owned by Corporation X. The 
corporations do not join in the filing of a consolidated return. 
Corporation X acquired 100 shares of Corporation T stock on Date 1 
for $1.50 each. On Date 2, Corporation Y acquires the assets of 
Corporation T for $100 of cash, their fair market value, in a 
transaction described in Sec.  1.368-2(l). Pursuant to the terms of 
the exchange, Corporation T does not receive any Corporation Y 
stock. Corporation T distributes the $100 of cash to Corporation X 
in liquidation. Pursuant to Sec.  1.368-2(l), Corporation Y will be 
deemed to issue a nominal share of Corporation Y stock to 
Corporation T in addition to the $100 of cash actually exchanged for 
the Corporation T assets, and Corporation T will be deemed to 
distribute all of the consideration to Corporation X. Corporation X 
will have a basis of $50 in the nominal share of Corporation Y stock 
under section 358(a). Corporation X will be deemed to distribute the 
nominal share of Corporation Y stock to Corporation P. Corporation X 
does not recognize the loss on the deemed distribution of the 
nominal share to Corporation P under section 311(a). Corporation P's 
basis in the nominal share is zero, its fair market value, under 
section 301(d).
    (ii) Analysis. Corporation X is deemed to receive the nominal 
share of Corporation Y stock described in Sec.  1.368-2(l). However, 
under paragraph (a)(2)(iii) of this section, Corporation X is not an 
actual shareholder of Corporation Y, the issuing corporation. 
Therefore, Corporation X cannot designate any share of Corporation Y 
stock to which the basis, if any, of the nominal share of 
Corporation Y stock will attach. Furthermore, Corporation P cannot 
designate a share of Corporation Y stock to which basis will attach 
because Corporation P receives the nominal share with a basis of 
zero.

    (d) Effective/applicability date. This section applies to exchanges 
and distributions of stock and securities occurring on or after 
November 21, 2011.
    (e) Expiration date. This section expires on or before November 18, 
2014.

     Approved: November 1, 2011.
Steven T. Miller,
Deputy Commissioner for Services and Enforcement.
Emily S. McMahon,
Acting Assistant Secretary of the Treasury (Tax Policy).
[FR Doc. 2011-29799 Filed 11-18-11; 8:45 am]
BILLING CODE 4830-01-P