Daily Tax Update - December 19, 2006


IRS AND TREASURY ISSUE TEMPORARY REGULATIONS REGARDING ACQUISITIVE "D" REORGANIZATIONS Today, the IRS and Treasury issued temporary regulations addressing situations when an actual issuance and distribution of stock are not required for a cross chain sale to qualify as a “D” reorganization. Under certain circumstances, the IRS and courts have held that the issuance and distribution of stock is a “meaningless gesture” and the lack thereof does not preclude a transaction from qualifying as “D” reorganization. See, e.g., James Armour, Inc. v. Comm’r, 43 T.C. 295 (1964); Wilson v. Comm’r, 43 T.C. 334 (1966); Rev. Rul. 70-20, 1970-1 C.B. 81.  Following the publication of a controversial ruling in PLR 200551018, a group of attorneys wrote a letter to the IRS in March 2006 asking for clarification of when an issuance and distribution of stock is required for a transaction to constitute a “D” reorganization.  The Temporary Regulations issued today are a response to that letter and the discussions and comments that followed:

  • The Temporary Regulations provide that in cases where the same person or persons own, directly or indirectly, all of the stock of the transferor and transferee corporations in identical proportions, the distribution requirement under sections 368(a)(1)(D) and 354(b)(1)(B) will be treated as satisfied even though no stock is actually issued in the transaction.
  • For purposes of applying the standard above, the Temporary Regulations provide that an individual and all members of his family that have a relationship described in the attribution rules in section 318(a)(1) will be treated as one individual.
  • The Temporary Regulations also provide that the distribution requirement will be treated as satisfied in the absence of any issuance of stock and/or securities where there is a de minimis variation in shareholder identity or proportionality of ownership in the transferor and transferee corporations.
  • In each case where it is determined that an actual issuance and distribution are not required, the following steps will be deemed to occur:
    • (i) A nominal share of stock of the transferee corporation will be deemed issued in addition to the actual consideration exchange in the transaction.
    • (ii) The nominal share of stock in the transferee corporation will then be deemed distributed by the transferor corporation to its shareholders.
    • (iii) In appropriate circumstances (e.g., indirect and constructive ownership), the nominal share of stock will be further transferred to the extent necessary to reflect the actual ownership of the transferor and transferee corporations.
  • The IRS and Treasury indicated that the they are currently undertaking a broad study of issues related to acquisitive reorganization, including the issues addressed by the Temporary Regulations.
  • The Temporary Regulations do not address how the proposed “No Net Value” regulations apply to acquisitive “D” reorganizations.
  • The Temporary Regulations applied to transactions occurring on or after March 19, 2007, except that they do not apply to any transaction occurring pursuant to a written agreement that is binding before December 19, 2006.

For additional information, contact Mark J. Silverman or Lisa M. Zarlenga.

The regulations can be accessed here.

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.

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