Daily Tax Update - January 16, 2007

IRS PROVIDES GUIDANCE ON ASSUMPTION OF LIABILITIES IN EXCESS OF BASIS IN ACQUISITIVE REORGANIZATIONS: Today, the IRS ruled (Rev. Rul. 2007-8) that section 357(c)(1) doesn’t apply to acquisitive asset reorganizations that also are section 351 exchanges.

Today, the IRS ruled (Rev. Rul. 2007-8) that section 357(c)(1) doesn’t apply to acquisitive asset reorganizations that also are section 351 exchanges.
  • The ruling addresses two transactions involving the acquisition of all of the assets and the assumption of all of the liabilities of a target corporation in exchange for stock of the acquiring corporation, followed by the liquidation of the target. In both acquisitions, the total amount of liabilities assumed exceed the total adjusted basis of the property transferred. One transaction qualifies as a section 368(a)(1)(D) acquisitive reorganization and the other qualifies as a section 368(a)(1)(C) reorganization. Both transactions also qualify as section 351 exchanges.
  • Prior to the enactment of the American Jobs Creation Act of 2004, section 357(c)(1) required the transferor to recognize gain if the liabilities assumed in a section 351 exchange or a section 368(a)(1)(D) reorganization exceed the total adjusted basis of the property transferred. The Jobs Act amended section 357(c)(1)(B) to remove acquisitive section 368(a)(1)(D) reorganizations from the application of section 357(c)(1). Citing legislative history, the IRS determined that such transactions were excluded because the transferor ceases to exist and can’t be enriched by the assumption of its liabilities. Therefore, the IRS concluded that the intent of the Jobs Act amendment was to exclude acquisitive reorganizations under sections 368(a)(1)(A), (C), (D), or (G) if the requirements of section 354(b)(1) are met, regardless of whether they are also section 351 exchanges.
  • For additional information, contact Mark J. Silverman - msilverman@steptoe.com or Lisa M. Zarlenga - lzarlenga@steptoe.com.
  • The revenue ruling can be accessed here.

IRS ISSUES CONSOLIDATED RETURN LOSS DISALLOWANCE REGS: Today, the IRS issued proposed regulations (REG-157711-02) under sections 358, 362(e)(2) and 1502 of the Internal Revenue Code (Code). The regulations apply to corporations filing consolidated returns. The preamble states that "the regulations implement aspects of the repeal of the General Utilities doctrine by redetermining members’ bases in subsidiary stock and requiring certain reductions in subsidiary stock basis on a transfer of the stock." The preamble further states that the proposed "regulations also promote the clear reflection of income by redetermining members’ bases in subsidiary stock and reducing the subsidiary’s attributes to prevent the duplication of loss." The proposed regulations include the proposed removal of Treas. Regulation sections 1.337(d)-1, 1.337(d)-2, and 1.1502-35.

IRS OFFERS IMPROVED FREE FILE PROGRAM: Today, the IRS and its private-sector partners announced the opening of this year's Free File program with a series of improvements and changes to help taxpayers. According to the IRS, "Seventy percent of the nation’s taxpayers — 95 million Americans — qualify for Free File. This year, up to 20 Free File Alliance companies will participate in the program run by the IRS and the Free File Alliance, a consortium of tax preparation software companies. The program is available only through IRS.gov."

  • IRS Commissioner Mark Everson said, "The Free File program has significant changes this year that make it an even better deal for taxpayers. A huge part of the taxpayer public can use these free services. Taxpayers should review the Free File offerings and see which one works best for them." Everson added, "This level of public satisfaction with Free File is just astounding. This innovative program provides real value to the taxpayers. Taxpayers will find we’ve made a great program even better this year."
  • Additional information can be accessed here.

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.