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Daily Tax Update - May 8, 2008

IRS ISSUES FINAL REGULATIONS ON THE ASSUMPTION OF LIABILITIES UNDER SECTION 358(h): Today, the IRS issued final regulations on the assumption of liabilities under section 358(h). These regulations adopt without change the proposed regulations published in 2005.
Under section 358(h)(1), if, after applying all other rules in section 358, the basis of property (e.g., stock) received in an exchange described in section 358(a) (such as a section 351 transaction) exceeds the fair market value of such stock, then such basis is reduced (but not below fair market value) by the amount of any liability assumed by another person as part of the exchange (e.g., the transferee corporation in a section 351 transaction) that has not reduced such basis already under section 358(d)(1) (such as certain pension or environmental liabilities).

These final regulations make unavailable the exception to section 358(h)(1) that otherwise would apply where substantially all of the assets with which the relevant liability is associated are transferred to the person assuming the liability as part of the exchange. The preamble to these regulations explains that the IRS and the Treasury Department “have determined that making the exception of section 358(h)(2)(B) unavailable is necessary to prevent abuse. . .” The proposed regulations apply to exchanges under section 358(a)(1) in which liabilities are assumed on or after June 24, 2003 and the final regulations are effective May 9, 2008.
For additional information contact Mark J. Silverman or Lisa M. Zarlenga.

IRS ISSUES FINAL REGULATIONS ON TRANSFERS OF ASSETS FOLLOWING TAX-FREE REORGANIZATIONS: Today, the IRS issued final regulations that amend the rules on the effect of post-reorganization transfers of assets or stocks on the continuity of business enterprise and other requirements for tax-free treatment under section 368(a).

In general, the existing regulations, finalized in October 2007, allow one or more post-reorganization transfers (or successive transfers) of assets or stock, provided that (1) the continuity of business enterprise (COBE) requirement is met, and (2) the transfers qualify as distributions under Treas. Reg. § 1.368-2(k)(1)(i) or “other transfers” under Treas. Reg. § 1.368-2(k)(1)(ii).
The final regulations amend the prior regulations to clarify that certain transfers are outside the scope of safe harbor protection (Treas. Reg. § 1.368-2(k)). Specifically, transfers to former shareholders of the acquired corporation (other than a former shareholder that is also the acquiring corporation) or surviving corporation will be outside the scope of the safe harbor protection if those transfers constitute receipt of consideration for proprietary interest in the corporation. In the preamble, the IRS explains that any such transfer “calls into question whether the underlying transaction satisfies the continuity of interest requirement. . .”
However, the final regulations emphasize that the safe harbor continues to apply to certain “upstream” reorganizations followed by a transfer of acquired assets.
The final regulations apply to transactions occurring on or after May 9, 2008.
For additional information contact Mark J. Silverman or Lisa M. Zarlenga.

IRS ADDRESSES TAX TREATMENT OF AN INTEGRATED TRANSACTION: Today, the IRS released Revenue Ruling 2008-25, which addresses the tax treatment of an integrated transaction whereby the stock of a target corporation is acquired in a taxable reverse subsidiary merger followed by the liquidation of the target.

Rev. Rul. 2008-25 will be published in Internal Revenue Bulletin 2008-21, dated May 27.
For additional information contact Mark J. Silverman or Lisa M. Zarlenga.

TAX BILLS INTRODUCED MAY 7TH:
H.R.2184 : To amend the Medicare Prescription Drug, Improvement, and Modernization Act of 2003 to expand comparative effectiveness research and to increase funding for such research to improve the value of health care.
Sponsor: Rep Allen, Thomas H. [ME-1] (introduced 5/7/2007) Cosponsors (4)

S.1318 : A bill to amend the Internal Revenue Code of 1986 to provide an incentive to preserve affordable housing in multifamily housing units which are sold or exchanged. Sponsor: Sen Schumer, Charles E. [NY] (introduced 5/7/2007) Cosponsors (7)

S.1322 : A bill to amend the Internal Revenue Code of 1986 to improve the operation of employee stock ownership plans, and for other purposes.
Sponsor: Sen Lincoln, Blanche L. [AR] (introduced 5/7/2007) Cosponsors (4)

INTERNAL REVENUE SERVICE - CIRCULAR 230 DISCLOSURE:
As provided for in Treasury regulations, advice (if any) relating to federal taxes that is contained in this communication (including attachments) is not intended or written to be used, and cannot be used, for the purpose of (1) avoiding penalties under the Internal Revenue Code or (2) promoting, marketing or recommending to another party any plan or arrangement addressed herein.

STEPTOE & JOHNSON LLP - TAX PRACTICE
Steptoe & Johnson LLP has one of the largest and most diverse law firm tax practices in the country. The practice covers the entire spectrum of federal taxation, including representation of businesses before the Congress, Treasury and the national office of the IRS; transactional planning for domestic and multinational corporations; complex audit and controversy work for corporations and other business interests contesting IRS adjustments; litigation before the Tax Court, Court of Federal Claims, district courts, courts of appeals and the Supreme Court. The firm's tax practice also encompasses all aspects of employee benefits (ERISA), executive compensation, tax-exempt organizations and charitable giving. Steptoe has an extensive state and local tax practice, representing an array of business clients on complex sales and use tax, corporate income tax and property tax matters, both advising those clients and handling audits, administrative appeals, and litigation for them. Read more information on Steptoe's tax practice.

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