Skip to content
Business Tax

IRS withdraws proposed regs on allocating consideration and basis recovery in corporate transactions

Thomson Reuters Tax & Accounting  

Thomson Reuters Tax & Accounting  

Withdrawal of Prop Reg REG-143686-07; The Allocation of Consideration and Allocation and Recovery of Basis in Transactions Involving Corporate Stock or Securities

IRS has withdrawn 2009 proposed regs that would have created a single model for stock basis recovery by a shareholder that receives a constructive or actual distribution to which Code Sec. 301 (dividend equivalent transactions) applies and a single model for sale and exchange transactions to which Code Sec. 302(a) (non-dividend equivalent transactions) applies, including certain elements of a reorganization exchange.

Background. Code Sec. 301 provides rules for the treatment of a distribution with respect to stock but doesn’t specify how to identify the shares upon which a distribution is made. The tax law doesn’t provide rules on whether a shareholder recovers its stock basis in the aggregate or on a share-by-share basis. Nor does it specifically provide that transactions treated as Code Sec. 301 distributions—i.e., Code Sec. 302(d)redemptions, certain Code Sec. 304 transactions, and certain reorganizations—should be subject to the same rules as actual Code Sec. 301 distributions. For reorganizations, the Code provides consequences resulting from different types of exchanges, but doesn’t specify whether the exchange is based on a shareholder’s aggregate stock holdings or on particular elements of the overall exchange. Rules related to stock basis recovery and stock basis determinations have evolved independently over many years on a transactional basis, sometimes leading to inconsistent treatment. (Preamble to Prop Reg REG-143686-07)

In 2009, IRS issued proposed regs (the 2009 Proposed regs) that, building on concepts developed in Reg. § 1.358-2 (dealing with the basis of stock or securities received in a corporate reorganization) and public comments, would have provided a single model for stock basis recovery by a shareholder that receives a distribution to which Code Sec. 301 applies and a single model for sale and exchange transactions to which Code Sec. 302(a) applies, including certain elements of an exchange in pursuance of a plan of reorganization under Code Sec. 368. The 2009 Proposed regs also would have defined the scope of the exchange that must be analyzed under particular Code provisions and provided a methodology for determining gain under Code Sec. 356 and stock basis under Code Sec. 358. The 2009 Proposed regs also included amendments to the current regs under Code Sec. 304 that would have updated those regs to reflect statutory amendments to that section. See Prop regs would radically revamp rules for allocating consideration and basis recovery in corporate transactions.

IRS withdraws proposed regs. After thoroughly considering comments received regarding the 2009 Proposed Regs, IRS has determined that it is unlikely that the approach of the 2009 Proposed regs can be implemented in comprehensive final regs without significant modifications. As a result, IRS has decided to withdraw the 2009 Proposed regs.

The chief concern raised by commenters was that the approach taken in the 2009 Proposed regs represented an unwarranted departure from current law as a result of which minor changes to an overall business transaction could cause meaningful changes to the tax consequences, thereby elevating the form of the transaction over its substance.

IRS says that it will continue to study the issues addressed in the 2009 Proposed regs, with a particular focus on issues surrounding Code Sec. 301(c)(2)Code Sec. 304, and Reg. §1.302-2(c).

IRS continues to believe that under current law, the results of a Code Sec. 301 distribution should derive from the consideration received by a shareholder in respect of each share of stock, notwithstanding designations otherwise. IRS also continues to believe that, under current law, with respect to redemptions governed by Code Sec. 302(d), any unrecovered basis in the redeemed stock of a shareholder may be shifted to other stock only if such an adjustment is a proper adjustment within the meaning of Reg. §1.302-2(c). Not all shifts of a redeemed shareholder’s unrecovered basis result in proper adjustments, and certain basis adjustments can lead to inappropriate results.

References: For dividend distributions, see FTC 2d/FIN ¶ J-2350 et seq.; United States Tax Reporter ¶ 3014 et seq. For stock redemptions, see FTC 2d/FIN ¶ F-11101 et seq.; United States Tax Reporter ¶ 3024et seq.

More answers