Daily Tax Update - January 4, 2005

Treasury and IRS Issue Proposed Regulations on Statutory Reorganizations Involving One or More Foreign Corporations:
Today, Treasury and the IRS issued two sets of proposed regulations affecting cross-border mergers.

  • The first set of proposed regulations would change two rules:
    • First, it would amend the definition of a "statutory merger or consolidation" (i.e., an "A" reorganization) to include certain mergers or consolidations effected pursuant to non-U.S. law. Historically, an "A" reorganization was defined as a transaction effected pursuant to the laws of the United States or a State or the District of Columbia.
    • The proposed regulations would eliminate the jurisdictional requirement and define a statutory merger or consolidation as a "transaction effected pursuant to the statute or statute necessary to effect the merger or consolidation," subject to certain requirements.
    • This definition could allow a transaction effected pursuant to non-U.S. law to qualify as an "A" reorganization provided that the transaction would otherwise qualify as a reorganization.
    • Second, the regulations would allow mergers involving disregarded entities to qualify as "A" reorganizations even if the combining entity, the combining entity of the transferee unit, or a disregarded entity involved in the transaction is a foreign entity (by deleting Temp. Reg. section 1.368-2T(b)(1)(iii)). The new proposed regs are prospective based on the date they are issued as final regs. Until that time, the temporary regs issued with the prior proposed regs control. Thus, until the new proposed regs are finalized, the two changes summarized above do not apply.
  • The second set of regulations were proposed under sections 358, 367, and 884. According to the preamble, the proposed regulations are intended "to account for statutory mergers or consolidations . . . involving one or more foreign corporations." However, the proposed regulations also contain numerous rules that would have effect even outside the scope of the first set of regulations described above, including a detailed set of rules relating to the determination of basis and holding periods for section 1248 shareholders and the application of sections 367(a) and (b).
    • Basis and Holding Period Rules: The proposed regulations include special basis rules that are intended to preserve section 1248 amounts in certain reorganizations (including certain triangular reorganizations). Under the proposed regulations, an exchanging section 1248 shareholder would generally be required to determine its basis in its acquiring corporation stock by reference to the particular block of target corporation stock exchanged therefor. In addition, the proposed regulations would provide special basis and holding period rules for triangular reorganizations where the merging or surviving corporation is a foreign corporation with a section 1248 shareholder. In certain circumstances, the controlling corporation’s basis in the surviving corporation’s shares would be determined by using outside stock basis rather than inside asset basis. 
    • Concurrent Application of Sections 367(a) and (b): The proposed regulations also provide rules prioritizing the application of section 367(a) and (b) to transactions where both provisions apply. Under current law, section 367(b) does not apply to a transaction that is taxable under section 367(a). According to the preamble, this rule has allowed taxpayers in certain circumstances to elect taxation under section 367(a) where the tax otherwise payable under section 367(b) would be significantly higher. The proposed regulations require, for transactions subject to Treas. Reg. § 1.367(b)-3 and section 367(a), that section 367(b) would apply before section 367(a).
  • Other Rules. The proposed regulations also contain rules regarding:
    • the application of the indirect stock transfer rules of section 367 to (i) certain triangular reorganizations and (ii) the transfer of assets subsequent to an asset reorganization under section 368(a)(1);
    • the coordination of the indirect stock transfer and asset transfer rules under section 367;
    • the application of section 367(b) to certain triangular reorganizations;
    • the application of section 367(b) to certain outbound reorganizations; and
    • nonrecognition transactions under the FIRPTA and PFIC provisions.
  • The regulations can be accessed here and here 
  • For additional information, contact Mark J. Silverman, Philip R. West, Lisa M. Zarlenga, or John J. Giles.

Congress Convenes 109th Session
Today, the House and Senate officially convene the 109th Congress. This week, much of the lawmakers’ time will be devoted to making committee assignments and adopting new procedures on how each chamber will operate. New Senate Finance Committee members are Sens. Mike Crapo (R-ID), Charles Schumer (D-NY), and Ron Wyden (D-OR). The House Ways and Means Committee is expected to fill its vacancies soon.

  • Permanently extending a variety of expiring tax cuts will be a priority for the Republican-controlled House and Senate early this session as well as overhauling the tax code. President Bush is expected to name panelists for his commission to reform the tax code early this year, but an overhaul of the tax code is unlikely to take place until after Social Security reform. Once the tax reform advisory panel members have been named, they are expected to make their suggestions to the Treasury Department, which will then make recommendations to the President.
  • The Joint Committee on Taxation has released a list of expiring tax breaks. The document can be accessed here.  

IRS UPDATES NEW SALES TAX PUBLICATION:
Today, the IRS announced today that it has updated the optional sales tax tables in Publication 600 for Arkansas, California, and Virginia. The "American Jobs Creation Act of 2004" authorized the sales tax deduction as an option for those who itemize deductions, letting them choose between deductions for state and local income or sales taxes.

  • Additional information can be accessed here.   
  • IRS RELEASES 2005 TAX FACT SHEETS:
    The IRS has released several 2005 filing season tax fact sheets, including ones on the new tax law changes and expanded electronic filing services.

    • The fact sheets can be accessed here.   

    Additional Information

    Steptoe & Johnson LLP’s recent tax alerts, speeches, and articles
    Previous editions of the Daily Tax Update
    Treasury Department news releases and fact sheets
    IRS news releases and fact sheets

    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